Pricing carbon causes a change in behaviour

Australia has ever so reluctantly introduced a carbon tax that will take effect from Sunday. Many there question the need to even take action, while in the EU we have been trying to make a difference since the early 1990's.

It is interesting to see the effect of a 'first move' in a tax regime. Taxes rely on changing prices to affect consumer and firms behaviour. If the price goes up then the nature of demand says that less will be bought.

Therefore the Australian carbon tax charges large firms for the carbon they use (Carbon dioxide emitted really) and they must recover this cost by raising prices.

How much prices go up and how much less of the high carbon goods are consumed is the interesting question. Economists have a way of estimating this, its called 'elasticity of demand' but it is not easy to tell exactly.

The Age reports that many firms have now prepared 'carbon-reduction plans' to avoid the Australian carbon tax. That is exactly the response they wanted - a case where tax avoidence is to be applauded.

The Age reports the story here