Hurrah, finally someone has managed to get a carbon tax to beat climate change right. Yes, it’s the Australians, with their new carbon tax that have got it right. The important point is this one:

The tax-free threshold for wage and salary earners to rise from A$6,000 a year to A$18,200 from July 1, 2012, and to A$19,400 from July 1, 2015.

Having written an entire book on just this subject of course I’m cheering this move.

The economics of this is just right. OK, well, if you think that climate change isn’t happening, we’re not causing it and that we shouldn’t do anything about it, sure, you’ll not be all that impressed. However, if you do think that all of those three things are true then this is the first such tax that has got things right.

We’ve an externality, something that is external to hte market prices that we use to make decisions. The answer to this is to internalise the whatever it is into market prices. This means a Pigou Tax and that’s just what the carbon tax is.

Good, so we’re correct there. However, there’s no reason at all that fighting climate change means a higher level of taxes in general. Sure, we might want higher (or even lower) total taxes for all sorts of other reasons but fighting climate change isn’t one of them. So, we’ve got this extra money coming in because we’re taxing carbon emissions: but we don’t want to raise the general level of taxation. So, of course, we should lower some other tax.

Which is exactly what Australia has done. And they’ve lowered the best tax to lower: income tax on the incomes of the poor. So, now we’re taxing bads (emissions) and lowering taxes on goods (the incomes of poor people).

All of which is just excellent and what most economists have been saying everyone should be doing for the past decade or more. The problem this reveals of course is that only one country has in fact done what economists have been recommending.