Defining effective carbon taxes | 

A carbon tax is a levy in countries and regions placed on: fossil fuel power plants, oil refineries, and/or industries and companies that use fossil fuels (in which case the tax applies directly). A carbon tax can also be applied to those industries and companies that consume energy-intensive goods and services that depend on fossil fuel energy generation, and emit carbon dioxide and other greenhouse gas emissions (GHGs) in the process (the tax applies indirectly).

An indirect consequence of carbon taxes may ultimately be higher prices for energy and gasoline/ diesel. The relationship between a carbon tax and higher energy prices is arbitrary, as it's up the the fossil fuel company whether to raise prices for the end-use consumer, take financial losses as a result of the tax, or use more renewable energy and energy efficiency measures to lower CO2 output and thus lower the applicable carbon tax.

A carbon tax puts a price on carbon for (at least some of) the cost to humanity and the planet of the use of fossil fuels. The cost of carbon dioxide emissions produced with the burning of fossil fuels is also known as the "social cost of carbon". Carbon-intensive industries that could be in carbon tax systems include: fossil fuel power plants (always in carbon tax systems), and/ or industries and companies such as fossil fuel intensive product manufacturing companies, and/ or cement and steel manufacturing, and/or transportation sectors that rely on fossil fuel energy.

This cost cannot be tabulated in exact terms, for it’s the accumulated cost of the damages of the burning of fossil fuels to the environment, damages from climate change, damages to human health, and related costs (negative externalities) of the use of fossil fuels that can only be estimated. The carbon tax itself can be seen as an added fee on the production and distribution of fossil fuels.

The government sets a price per ton on carbon, and then that translates into a tax on oil, coal, and natural gas. This does usually mean higher prices for the end-use consumer for things like gas and electricity, due to higher costs for production and distribution of fossil fuels, and fossil fuel-intensive products and services; in the case of top-down industry carbon taxes.

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 (such as carbon capture); to try and lower their applicable carbon taxes. Another option would be for companies facing a carbon tax to maintain the market price for their goods and services set prior to implementation of the tax, and absorb the cost of the tax.

Yet another option, and along with companies' making an effort to produce cleaner energy, this is a commonly implemented option; higher prices due to carbon taxes may result in higher prices to end-consumers (the carbon tax simply gets passed on to the consumer, allowing the company to keep profits from lowering).

Individual consumers then have the incentive to reduce consumption of fossil fuels and fossil fuel-intensive products subject to carbon taxes, switch to electric vehicles and renewable energy (thus avoiding higher prices stemming from the carbon tax), and increase their energy efficiency habits. Revenue from carbon taxes can, in some cases, go to energy efficiency measures, sustainable transportation, renewable energy, and other clean energy projects.

The revenue from carbon taxes can also simply be distributed or refunded to the public through tax rebates or payroll tax reductions (revenue-neutral carbon taxes). With revenue-neutral carbon taxes, higher energy prices may be offset by tax dividend refunds, or tax cuts, of roughly similar value.

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

The principle of mitigating negative externalities (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 may ultimately end up paying more for gas and on the utility bill, among other fossil fuel related goods and services; instead of the fossil fuel-intensive companies in industries subject to carbon taxes, that haven't already fully embraced renewable energy and/ or energy efficiency.

A carbon tax is enacted with the goal of lowering greenhouse gas emissions. Sustainable public transit, energy efficiency products, renewable energy, and GHG reduction technologies such as carbon capture and storage, become even greater alternatives as fossil fuel use is penalized; and clean energy is made relatively cheaper. One other benefit of carbon taxes, besides the revenue generated for the public good, and the incentives to reduce fossil fuel consumption and increase clean energy efforts; is the increased attractiveness of the cost of renewable energy, which is made cheaper than fossil fuels.

Carbon taxes worldwide

Denmark, Finland, Ireland, the Netherlands, Norway, Sweden, Switzerland, British Colombia, Canada, and the UK (among other countries and localities) have all successfully implemented a partial carbon tax on some industries, as well as some fossil-fuel-intensive goods and services.

Thus far, these countries have not been able to implement a broad, universal carbon tax. Generally, reports of lower greenhouse gas emissions follow the passage of a carbon tax (to the tune of 2-3% annually in most cases). The province of British Columbia, Canada, has reported drops of around 5% annually of greenhouse gas emissions due to its aggressive carbon tax policies.

This is a global map of carbon tax and cap-and-trade systems that are existing and planned for implementation:

Please also see:

Putting a price on carbon