It’s probably the most hotly debated issue around the world today – global warming – and I’ve finally decided to share a few thoughts on the subject. My starting point is that you buy into the concept that global warming is a real crisis facing mankind. If you don’t, you might as well stop here.

Before we start, if you have been wondering what CPRS, ETS, carbon taxes and “cap and trade” are all about then I suggest you read the article written by Glenda Kwek in today’s Sydney Morning Herald, which provides a high level, easy to read guide to the the science and politics of carbon emissions.

Today I wish to write about one aspect of emissions reduction – its impact on prices. It’s a subject that politicians the world over try to avoid. I guess I can understand – telling your electorate that it will have to pay more for most of what it consumes would require the kind of courage and leadership we rarely see.

So what will the Carbon Pollution Reduction Scheme (CPRS) mean for you, Mr or Mrs Consumer? In the most simple terms, many of the goods and services you buy will end up costing more. Why? Prices will be higher due to the fact that, for the first time in history, the social and environmental costs of producing goods and services will be reflected in the prices of those goods and services. How much more? Too hard to say at this stage; it will vary for every good and service – the greater the amount of carbon required to produce a particular good or service the greater the impact on its price. As you know, energy is used and CO2 created in all steps of the production process from extracting and processing raw materials through to manufacturing and distribution to the end user (you) – so there will likely be additional costs added at each step of the supply chain.

So, if it’s bad news for every Australian’s family budget, why does the Government want to introduce the CPRS? The simple answer is to reduce our carbon emissions (or at least the rate of growth of our emissions) to try to slow down global warming. Unfortunately, basic economics tells us that the best way to achieve this reduction in emissions is through prices:

• Higher prices for more energy intensive goods and services should lead to reduced demand from consumers for them (i.e. less are produced)
• Higher prices for electricity produced from “dirty” sources (i.e. coal) should lead to increased investment in more expensive, “clean” sources of generating energy (e.g. wind or solar)
• Higher prices for energy should incentivise producers to find more efficient ways of producing goods and services to keep down their costs
• Higher prices for household power and gas should incentivise consumers to use less energy

In other words, consumers and businesses will only “do the right thing” by the environment if they are incentivised to do so (or punished for not doing so).