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A carbon tax is a tax on greenhouse gas emissions, designed to limit and control emissions based on the scientific theory that excessive levels of such gases can lead to an unwanted rise in temperature. A carbon tax accounts for the social cost of emissions and can be applied to all emissions or given as a cap to companies. The most common alternative is a cap and trade scheme. However, a carbon tax can be a disadvantage as it is imposed as a national measure trying to solve an international problem.
A carbon tax is a tax on greenhouse gas emissions, usually carbon dioxide. The tax was conceived as a financial means of controlling and limiting these emissions. It is based on the scientific theory that excessive levels of such gases become trapped in the Earth’s atmosphere, which can lead to an unwanted rise in temperature.
From a purely economic basis, a carbon tax is designed to account for the social cost of such emissions. This social cost is an attempt to define a financial value to reflect the damages suffered by society that are not accounted for when companies determine the prices of their goods and services. In practice, this number can only be an estimate, while the definition of tax levels must also incorporate political concerns.
In some cases, a carbon tax is applied to all emissions. In others, companies are given a cap and pay a tax on all emissions above that level. Such limits can be gradually reduced each year, so that companies have more time to change their production techniques.
Like other taxes designed to influence behavior, a carbon tax cannot be considered a revenue-raising measure. At first glance, it might seem logical to argue that a carbon tax is doubly effective, as it can reduce emissions while also raising money to spend on environmental projects. In practice, this cannot work both ways: if the tax achieves the stated objective of reducing emissions, the amount of revenue raised will fall or reach zero.
One of the main disadvantages of a carbon tax system is that it is imposed as a national measure trying to solve an international problem. There is a risk that companies that are at risk of paying higher taxes will move to other countries with lower taxes or even no taxes related to the environment. In this situation, a national government can impose duties on imports from that country to make up the deficit.
The most common alternative to a carbon tax is a cap and trade scheme. Under this system, companies are given a designated level of emissions they can produce each year. Those who have emission levels lower than their target earn credits. They can sell these credits to other companies, which is the only legal way for these companies to exceed their own target levels. The idea is that the system forces the “cost” of emissions to be incorporated into the production process.
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