More carbon tax – a quick note on the effect of compensation

I’ve heard a lot of rubbish about how compensation for individuals will remove the incentive for companies to reduce their carbon emissions. Now, I’m no economist, but I just want to call out this transparently false argument: customers will still seek lower prices as can be offered by energy companies that can reduce their carbon emissions, provided the compensation scheme is anything short of braindead. It works like this:

Effect of compensation on emissions: a net reduction.

In words:

  1. John Smith purchases electricity from Company A
  2. The government compensates John Smith for a portion of his energy bill
  3. Company B offers cleaner energy, which is cheaper for them to produce because of the carbon tax burden, so Company B can offer lower prices than Company A
  4. John Smith switches to Company B, lowering his net carbon footprint and his energy bill, while still enjoying the government compensation.

The net result of this is a lowering of carbon emissions.

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