Carbon Tax - a levy on pollution whose time has come

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Carbon tax is a levy on pollution

A carbon tax is aimed at putting a price on carbon and lowering greenhouse gas emissions. A carbon tax is a levy on industries, companies, and/ or consumers that use fossil fuels and emit greenhouse gas emissions (GHG). The carbon tax puts a price on carbon (carbon dioxide/ GHG emissions) for the cost to humanity and the planet of the use of fossil fuels.

This cost cannot be tabulated in exact terms, for it’s the accumulated cost of the damage to the environment, damage to human health, and related costs of the use of fossil fuels that can only be estimated. The carbon tax itself can be a fee on the production and distribution of fossil fuels, or it can apply to consumers only. The government sets a price per ton on carbon, and then that translates into a tax on oil, coal and natural gas. This ultimately means higher prices for the end consumer for things like gas and electricity due to higher costs for production and distribution of fossil fuels in the case of top-down industry taxes, or the taxes might be just aimed at consumers, in some cases.

Businesses and utilities who face a carbon tax then have the incentive to invest more in energy efficiency, renewable energy and other GHG reducing technologies, and/ or maintain the market price for their goods and services, and absorb the cost of the tax, or pass the added fee on to individual consumers by raising prices. Individual consumers then have the incentive to reduce consumption and increase their energy efficiency habits due to steeper costs for energy and gas. Revenue from carbon taxes can, in some cases, go to energy efficiency measures, sustainable transportation, renewable energy and other clean energy projects, but often the revenue is simply refunded to the public.

Carbon tax revenue is usually distributed, at least in part (if not completely), as: personal income or business income tax cuts, rebates, tax credits, a "carbon dividend" in the form of a monthly, quarterly, bi-annual or annual refund or to reduce taxes for the public and businesses in other arenas. Carbon tax revenue is also sometimes both invested in clean energy projects and given back to the public as refunds.

The principle of mitigating negative externalities (such as the damage caused by fossil fuels), and having the relative costs of pollution paid for, is the primary purpose of the carbon tax. Who bears the ultimate burden of the tax is a hypothetical question that has a couple of answers. Unless the carbon tax is specifically aimed at consumers, businesses that produce and distribute fossil fuels should at least consider bearing the brunt of the tax. However, in practice, individuals ultimately end up paying more for gas and on the utility bill, among other fossil fuel related goods and services, from companies that haven't already fully embraced renewable energy. 

A carbon tax is enacted to lower greenhouse gas emissions. Sustainable public transportation, energy efficiency products, renewable energy and things like clean coal technologies such as carbon capture and storage become even greater alternatives for energy use, as fossil fuel use is penalized. One other benefit of a carbon tax, besides the revenue generated for the public good, and the incentives to reduce consumption and increase energy efficiency, is the increased attractiveness of the cost of renewable energy, which is made closer to cost parity with fossil fuels.

Denmark, Finland, Ireland, the Netherlands, Norway, Sweden, Switzerland, and the UK (among other countries) have all successfully implemented a partial carbon tax on some goods and services, while not being able to implement a broad, universal carbon tax. In addition, British Colombia, Canada, among other municipalities, has also successfully enacted carbon tax policies. Generally, reports of lower greenhouse gas emissions follow the passage of a carbon tax (to the tune of 2-3% annually in most cases this decade). The province of British Columbia, in Canada, has reported drops of around 5% annually of greenhouse gas emissions due to its aggressive carbon tax policies. 

Please see: Carbon Cap and Trade: putting a price on carbon