Carbon tax
A carbon tax is a tax levied on the carbon emissions from producing goods and services. Carbon taxes are intended to make visible the hidden social costs of carbon emissions. They are designed to reduce greenhouse gas emissions by essentially increasing the price of fossil fuels. This both decreases demand for goods and services that produce high emissions and incentivizes making them less carbon-intensive. When a fossil fuel such as coal, petroleum, or natural gas is burned, most or all of its carbon is converted to. Greenhouse gas emissions cause climate change. This negative externality can be reduced by taxing carbon content at any point in the product cycle.
A carbon tax as well as carbon emission trading is used within the carbon price concept. Two common economic alternatives to carbon taxes are tradable permits with carbon credits and subsidies. In its simplest form, a carbon tax covers only emissions. It could also cover other greenhouse gases, such as methane or nitrous oxide, by taxing such emissions based on their -equivalent global warming potential. Research shows that carbon taxes do often reduce emissions. Many economists argue that carbon taxes are the most efficient way to tackle climate change., carbon taxes have either been implemented or are scheduled for implementation in 25 countries. 46 countries have put some form of price on carbon, either through carbon taxes or carbon emission trading schemes.
Some experts observe that a carbon tax can negatively affect public welfare, tending to hit low- and middle-income households the hardest and making their necessities more expensive. Alternatively, the tax can be too conservative, making "comparatively small dents in overall emissions". To make carbon taxes fairer, policymakers can try to redistribute the revenue generated from carbon taxes to low-income groups by various fiscal means. Such a policy initiative becomes a carbon fee and dividend, rather than a plain tax.
Purpose
Carbon dioxide is one of several heat-trapping greenhouse gases emitted as a result of human activities. The scientific consensus is that human-induced greenhouse gas emissions are the primary cause of climate change, and that carbon dioxide is the most important of the anthropogenic greenhouse gases. Worldwide, 27 billion tonnes of carbon dioxide are produced by human activity annually. The physical effect of in the atmosphere can be measured as a change in the Earth-atmosphere system's energy balancethe radiative forcing of.Different greenhouse gases have different physical properties: the global warming potential is an internationally accepted scale of equivalence for other greenhouse gases in units of tonnes of carbon dioxide equivalent. Carbon taxes are designed to reduce greenhouse gas emissions by increasing prices of the fossil fuels that emit them when burned. This both decreases demand for goods and services that produce high emissions and incentivizes making them less carbon-intensive.
Economic theory
History and Rationale
A carbon tax is a form of pollution tax. David Gordon Wilson first proposed this type of tax in 1973. Unlike classic command and control regulations, which explicitly limit or prohibit emissions by each individual polluter, a carbon tax aims to allow market forces to determine the most efficient way to reduce pollution. A carbon tax is an indirect tax—a tax on a transaction—as opposed to a direct tax, which taxes income. Carbon taxes are price instruments since they set a price rather than an emission limit.In addition to creating incentives for energy conservation, a carbon tax puts renewable energy such as wind, solar and geothermal on a more competitive footing. In economic theory, pollution is considered a negative externality, a negative effect on a third party not directly involved in a transaction, and is a type of market failure. To confront the issue, economist Arthur Pigou proposed taxing the goods, that were the source of the externality so as to accurately reflect the cost of the goods to society, thereby internalizing the production costs. A tax on a negative externality is called a Pigovian tax, which should equal the cost.
Within Pigou's framework, the changes involved are marginal, and the size of the externality is assumed to be small enough not to distort the economy. Climate change is claimed to result in catastrophe changes. "Non-marginal" means that the impact could significantly reduce the growth rate in income and welfare. The amount of resources that should be devoted to climate change mitigation is controversial. Policies designed to reduce carbon emissions could have a non-marginal impact, but are asserted to not be catastrophic.
Design
The design of a carbon tax involves two primary factors: the level of the tax, and the use of the revenue. The former is based on the social cost of carbon, which attempts to calculate the numeric cost of the externalities of carbon pollution. The precise number is the subject of debate in environmental and policy circles. A higher SCC corresponds with a higher evaluation of the costs of carbon pollution on society. Stanford University scientists have estimated the social cost of carbon to be upwards of $200 per ton. More conservative estimates pin the cost at around $50.The use of the revenue is another subject of debate in carbon tax proposals. A government may use revenue to increase its discretionary spending, or address deficits. However, such proposals often run the risk of being regressive, and sparking backlash among the public due to an increased cost of energy associated with such taxes. To avoid this and increase the popularity of a carbon tax, a government may make the carbon tax revenue-neutral. This can be done by reducing income tax proportionate to the level of the carbon tax, or by returning carbon tax revenues to citizens as a dividend.
Carbon leakage
happens when the regulation of emissions in one country/sector pushes those emissions to other places with less regulation. Leakage effects can be both negative and positive. Negative leakages, which are desirable, can be referred to as "spill-over".According to one study, short-term leakage effects need to be judged against long-term effects. A policy that, for example, establishes carbon taxes only in developed countries might leak emissions to developing countries. However, a desirable negative leakage could occur due to reduced demand for coal, oil, and gas in developed countries, lowering prices. This could allow developing countries to replace coal with oil or gas, lowering emissions. In the long-run, however, if less polluting technologies are delayed, this substitution might have no long-term benefit. Carbon leakage is central to climate policy, given the 2030 Energy and Climate Framework and the review of the European Union's third carbon leakage list.
Carbon tariff
Impacts
Positive impacts
Research shows that carbon taxes effectively reduce greenhouse gas emissions. Most economists assert that carbon taxes are the most efficient and effective way to curb climate change, with the least adverse economic effects. One study found that Sweden's carbon tax successfully reduced carbon dioxide emissions from transport by 11%. A 2015 British Columbia study found that the taxes reduced greenhouse gas emissions by 5–15% while having negligible overall economic effects. A 2017 British Columbia study found that industries on the whole benefited from the tax and "small but statistically significant 0.74 percent annual increases in employment" but that carbon-intensive and trade-sensitive industries were adversely affected. A 2020 study of carbon taxes in wealthy democracies showed that carbon taxes had not limited economic growth. Carbon taxes also appear to not adversely affect employment or GDP growth in Europe. Their economic impact ranges from zero to modest positive.Negative impacts and trade-offs
A number of studies have found that in the absence of an increase in social benefits and tax credits, a carbon tax would hit poor households harder than rich households. Gilbert E. Metcalf disputed that carbon taxes would be regressive in the US. Carbon taxes can increase electricity prices. There is a debate about the relation between carbon pricing and climate justice. Carbon pricing can be adjusted to some principles of climate justice like polluters pay. Many proponents of climate justice object to carbon pricing. To close the gap between the two concepts, carbon pricing could put a cap on emissions, remove pollution from underserved communities, and justly divide revenues.Support and opposition
Since carbon taxation was first proposed, numerous economists have described its strengths as a means of reducing CO2 pollution. This tax has been praised as "a far better way to control pollution than the present method of specific regulation." It has also been lauded for its market based simplicity. This includes a description as "the most efficient way to guide the decisions of producers and consumers", since "carbon emissions have an 'unpriced' societal cost in terms of their deleterious effects on the earth's climate."Since 2019 over 3,500 U.S. economists have signed The Economists' Statement on Carbon Dividends. This statement describes the benefits of a U.S. carbon tax along with suggestions for how it could be developed. One recommendation is to return revenues generated by a tax to the general public. The statement was originally signed by 45 Nobel Prize winning economists, former chairs of the Federal Reserve, former chairs of the Council of Economic Advisers, and former secretaries of the Treasury Department. It has been recognized as a historic example of consensus amongst economists. Ben Ho, professor of economics at Vassar College, has argued that "while carbon taxes are part of the optimal portfolio of policies to fight climate change, they are not the most important part."
Carbon taxes have been opposed by a substantial proportion of the public. They have also been rejected in several elections, and in some cases reversed as opposition increased. One response has been to specifically allocate carbon tax revenues back to the public in order to garner support. Citizens' Climate Lobby is an international organization with over 500 chapters. It advocates for carbon tax legislation in the form of a progressive fee and dividend structure. NASA climatologist James E. Hansen has also spoken in favor of a revenue neutral carbon fee.