Carbon tax refers to a tax that is levied on the carbon content of fuels. It is a type of carbon pricing and a form of pollution pricing.
A number of countries have either implemented or plan to implement some form of carbon taxation. Such taxes could reduce greenhouse gas emissions and also raise revenue for climate change mitigation efforts.
Carbon Tax vs Fossil Fuels and Climate Change
The ever-increasing concentration of greenhouse gases in the atmosphere from burning fossil fuels is considered one of the major causes of climate change. It has been associated with environmental degradation across the world.
Carbon dioxide is one of the key greenhouse gases that form a blanket around our planet. It traps heat inside and makes the planet warmer over time.
As humans emit more carbon dioxide into the air by burning fossil fuels, the greater the impact on global warming will be.
This increased level in temperature will result in extreme weather changes, poor air quality, and increased food prices.
To curb these effects, countries must create a balance between the level of carbon emissions and their goals for development.
Consequences of Carbon Emissions
The impacts of carbon emissions are often hidden and not recognized by citizens and governments. These impacts typically fall under two broad categories: economic and societal costs.
Economic Costs
a) Resource Damages Due to Climate Change
Climate change results in a significant reduction in agricultural yields, flooding, drought, and erosion. It also has consequences on the quality of our resources because of the acidification of the soil and water.
b) Health Care Costs
Air pollutants, particulate matter, poor water quality, and food contamination affect human health leading to:
- respiratory disease,
- cardiovascular disease,
- cancer,
- hormone disruption,
- developmental delays in children, etc.
These are not only devastating for all of us in the preservation of our health and that of future generations. These also ultimately results in an increase in public health costs.
Societal Costs
a) Damage to Infrastructure
Extreme weather conditions like heat or cold waves lead to increased energy demand for cooling or heating purposes resulting in damage to infrastructure because of power grid disruptions, energy shortages, fires, or snow storms.
b) Losses Due to Stranded Assets
As countries move towards clean energy systems, it is estimated that up to billions worth of fossil fuel assets may become unviable. This will result in losses for companies involved in the production of such fuels.
Proper investments now can help avoid these risks by putting money in the right technologies at the right time. For example, early investments in renewable sources can avoid future losses due to climate change-related disruptions and changes in governmental policies.
c) Decline in Agricultural Products
The production of certain crops such as corn and wheat is expected to decline due to the negative effects of climate change on growing conditions.
Proposed Solution: The Carbon Tax
In an attempt to reduce greenhouse gas emissions from the manufacturing, transportation, and power generation sectors that contribute most to climate change, policymakers have been proposing a carbon tax.
The purpose of the carbon tax is to shift away from the usage of coal and encourage the use of renewable sources for energy production such as wind and solar. It increases the cost of fossil fuels in order to make alternative energy more competitive in price.
The idea is to put a price on each ton of carbon. This will deter companies from producing, and customers from consuming, products or services that lead to the emission of large amounts of carbon in the atmosphere. As a result, there will be a reduction of greenhouse gas emissions.
Carbon Tax Implementation
A carbon tax is levied on all individuals, organizations, government agencies, and corporations producing greenhouse gas emissions.
In contrast with control regulations, that either limit or prohibit carbon dioxide emissions, a carbon tax allows the market to determine the price of carbon.
The carbon tax is different from a cap-and-trade program, in which the government sets an upper limit on emissions and allows companies to buy and sell permits or credits for their emissions. It is considered more effective because they provide more certainty on the price of carbon emissions.
A carbon tax can be implemented by taxing the production or consumption of fossil fuels based on how much greenhouse gas it emits into the atmosphere when burned.
For example, coal, which produces more carbon dioxide, would have a higher tax rate than oil, which has half the carbon dioxide output per barrel.
The new tax rate might push producers to switch fuel sources or lower their production levels, reduce demand, or both, which would result in reduced overall greenhouse gas emissions.
The new policy also increases the costs of goods and services that use fuels with high levels of carbon emissions.
Carbon Tax Practice Around the World
Although there is no single global model used for the implementation of the carbon tax across regions, most countries use similar methods to levy such taxes.
Finland
Finland is the first country to implement a carbon tax in the 1990s in an attempt to reduce greenhouse gas emissions. It initially quoted a carbon tax rate of $1.41 per tonne of carbon dioxide. After several reforms, the country decided to merge carbon tax and energy tax at a rate of $24.2 per tonne of carbon dioxide and $65.68 per tonne of carbon.
Sweden
Sweden also implemented a carbon tax in 1991 to reduce emission levels by a material percentage between 1990 and 2010. It initially had imposed a rate of SEK 250 (≅ $28.01) per tonne of carbon dioxide. In 2021, it has increased to SEK 1,200 (≅ $134.43) per tonne of carbon dioxide.
According to Emma Lindberg, a Swedish Society for Nature Conservation climate change expert, "It was the one major reason that steered society towards climate-friendly solutions. It made polluting more expensive and focused people on finding energy-efficient solutions."
Switzerland
Switzerland also adopted this system in 2008. It charges companies for the emissions, but returns the money to its citizens as an environmental subsidy. Specifically, it redistributes two thirds of the collected revenue to households on a per capita basis and to firms depending on their payroll. The remaining one third of the collected revenue is utilized for building energy efficiency programs and technology funds.
British Columbia
Due to regional climate change, British Columbia implemented a carbon tax in 2008. This resulted in an improvement in the environmental quality of the region. As of 2019, several Canadian provinces have adopted the federal carbon tax, while others have also drafted carbon tax programs in their respective regions.
United States
In the United States, several federal carbon tax proposals have been submitted in recent years such as America’s Clean Future Fund Act, American Opportunity Carbon Fee Act, Energy Innovation and Carbon Dividend Act, Climate Action Rebate Act, and America Wins Act. However, none of these has been enacted.
Other Developing Countries
Studies indicate that developing countries like China, India, Mexico, Brazil, South Africa, and Turkey have been taking action to reduce their greenhouse gas emissions. These efforts are driven by imperatives for alleviation of poverty and environmental protection. These countries implement various energy efficiency programs, fuel switching, enforcement of clean air laws, and population control in order to mitigate climate change.
Although there have been limited cases of carbon tax implementation around the world, it can be said that such taxes have had positive effects on the environment and society.
Organizations and Resources for Carbon Taxes
- Citizens’ Climate Lobby - www.citizensclimate.org
- Resources for the Future - https://www.rff.org/
- Carbon Tax Center - https://www.carbontax.org/blog/
- Students for Carbon Dividends - https://www.s4cd.org/
- Climate Leadership Council - https://clcouncil.org/
- RepublicEn - https://republicen.org/
- International Monetary Fund - https://blogs.imf.org/tag/carbon-tax/
- Niskanen Center - https://www.niskanencenter.org/
Conclusion
The carbon tax is a proven and effective mechanism for reducing greenhouse gas emissions and curbing climate change. It can help developing countries with its financial implications providing them further incentives to switch to sustainable energy resources.
However, it is critical to consider different perspectives on such taxation mechanisms as variable effects on human societies need to be considered as well before implementing such policies. Lawmakers around the world should work together to determine an ideal taxation mechanism that is suitable for their respective regions.
FAQs
1. What is a carbon tax?
A carbon tax is a levy imposed on the producers and/or importers of any goods, based on their carbon content. In other words, it is a fee imposed by governments on activities that emit greenhouse gases.
2. Who could be affected by the carbon tax?
Everyone who emits greenhouse gases will probably have to pay a fee for their actions. This includes utility suppliers, airlines, manufacturers, coal mines, and oil refineries – essentially anyone who uses or produces petroleum materials or other forms of energy that pollute the environment with harmful emissions. It has been well-established through multiple studies that the costs of carbon taxes are passed on to consumers.
3. What is the goal of a carbon tax?
The ultimate goal is to reduce greenhouse gas emissions, which are the main driver behind climate change. Governments are more likely to adopt policies that encourage clean energy use through price signals rather than regulation.
4. What are the effects of a carbon tax?
By increasing the price of fossil fuels, businesses and individuals have an incentive to move towards greener energy sources. Additionally, it discourages high emission power generation designs as well as petrol/diesel vehicles, in favor of low or zero-emission technologies. As seen with other taxation mechanisms, the carbon tax can become an additional source of revenue for countries that utilize such a policy.
5. Who supports the carbon tax and who opposes it?
Those in favor of such taxation mechanisms include governments, academics, environmental groups, and NGOs – pretty much everyone that can see the detrimental effects of climate change and wants to take action before it is too late. The majority of those against such policies are organizations/companies involved with fossil fuels such as oil companies and coal producers.
