A poster in another thread wrote: I am less convinced how we will change anything at all with a carbon tax that carbon polluters simply pass onto consumers. To me it simply means that we will produce the same amount of carbon and consumers will pay for it. Surely rather than penalizing (taxing) we would be better off rewarding good behaviour (carbon reduction) with incentives.
As I understand it, the proposed price on carbon will be designed to do both. It will penalise old technology and provide incentives for new technology.
The idea of pricing an undesirable by-product is nothing new. It assumes the market will adjust accordingly.
If there is preferred substitute technology available but still so new that it's on the higher part of its declining cost curve, then a price for the old undesirable technology will make the new preferred substitute more competitive and more businesses will adopt it. The increased volume of production will help speed up the trip down the price curve of the new tech. (That's assuming the price is set at an appropriate level.)
Eventually the preferred technology will come in at an equal or lower cost than the old technology.
A subsidy / incentive for new tech will speed up the adoption even more. And the price penalty on the old tech can be used for this initial subsidy of the new tech.
If instead the new technology is given a subsidy without any penalty for the old technology, it will take longer for the new tech to be introduced. There is only one pressure working. In addition, there is nowhere for the subsidy to come from except maybe taxpayers. And no flexibility to ensure the incentive will be sufficient to drive the change, or drive it as quickly as is wanted.
A similar principle is often adopted by companies (especially high tech companies), selling a new product below the cost of production on the basis that as production ramps up the per unit cost will decline such that it will be very profitable as volume increases. The initial loss of the new product is absorbed by sales of existing older products and/or offset by profits from future sales. (Similar to the idea of a 'loss leader'.)
Eventually there should be no reason for a price on carbon, when better options become at least as cost effective as the carbon polluting technologies, especially when the cost of the pollution is factored in.
The price on carbon is viewed as being important in order to speed up the transition process, because of the urgency of doing so.
(As an example of willingness to pay more for better technology, in our town, the residents voted to pay a substantial upfront payment for ozone treated water (which has no residual effect) rather than have to use chlorinated water, which would have had no upfront cost. The town is predominately a 'workers' town, not an uppity neighbourhood. The residents didn't want to be drinking chlorine-flavoured water and were willing to pay to avoid having to do so).
