Carbon tax

A carbon tax is a tax levied on the carbon content of fuels and, like carbon emissions trading, is a form of carbon pricing. As of 2018 at least 27 countries and subnational units have implemented carbon taxes. Research shows that carbon taxes effectively reduce greenhouse gas emissions. Economists generally argue that carbon taxes are the most efficient and effective way to curb climate change, with the least adverse effects on the economy. A carbon tax is a tax levied on the carbon content of fuels and, like carbon emissions trading, is a form of carbon pricing. As of 2018 at least 27 countries and subnational units have implemented carbon taxes. Research shows that carbon taxes effectively reduce greenhouse gas emissions. Economists generally argue that carbon taxes are the most efficient and effective way to curb climate change, with the least adverse effects on the economy. When a hydrocarbon fuel such as coal, petroleum, or natural gas is burnt, its carbon is converted to carbon dioxide (CO2) and other compounds of carbon. CO2 is a heat-trapping greenhouse gas which causes global warming, which damages the environment and human health. Since greenhouse gas emissions from the combustion of fossil fuels are closely related to the carbon content of the respective fuels, this negative externality can be compensated for by taxing the carbon content of fossil fuels at any point in the product cycle of the fuel. Carbon taxes offer a potentially cost-effective means of reducing greenhouse gas emissions. From an economic perspective, carbon taxes are a type of Pigovian tax and help to address the problem of emitters of greenhouse gases not facing the full social cost of their actions. To prevent them being regressive taxes carbon tax revenues can be spent on low-income groups. Carbon dioxide is one of several heat-trapping greenhouse gases (GHGs) emitted by humans (anthropogenic GHGs) and the scientific consensus is that human-induced greenhouse gas emissions are the primary cause of global warming, and that carbon dioxide is the most important of the anthropogenic GHGs. Worldwide, 27 billion tonnes of carbon dioxide are produced by human activity annually. The physical effect of CO2 in the atmosphere can be measured as a change in the Earth-atmosphere system's energy balance – the radiative forcing of CO2. Carbon taxes are one of the policies available to governments to reduce GHG emissions. In the Kyoto Protocol (an international treaty), CO2 emissions are regulated along with other GHGs. Different GHGs 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. A carbon tax is a form of pollution tax. Pollution taxes are often grouped with two other economic policy instruments: tradable pollution permits/credits and subsidies. These three environmental economic policy instruments are built upon a foundation of a command and control regulation. The difference is that classic command-penalty regulations stipulate, through performance or prescriptive standards, what each polluter is required to do to be in compliance with the law. Command and control regulation is not considered an economic instrument as it is typically enforced by narrower means such as stop or control order, though it may include an administrative monetary penalty in site-specific regulations. The instrumental distinction between a tax and a command-and-control regulation is determined by the enacted legislative names, and whether they contain 'tax' as a defined term within the Act, for example British Columbia's Carbon Tax Act versus Alberta's Specified Gas Emitters Regulation, Alta Reg 139/2007 A carbon tax is also an indirect tax—a tax on a transaction—as opposed to a direct tax, which taxes income. A carbon tax is called a price instrument, since it sets a price for carbon dioxide emissions. In economic theory, pollution is considered a negative externality, a negative effect on a party not directly involved in a transaction, which results in a market failure. To confront parties with the issue, the economist Arthur Pigou proposed taxing the goods (in this case hydrocarbon fuels), which were the source of the negative externality (carbon dioxide) so as to accurately reflect the cost of the goods' production to society, thereby internalizing the costs associated with the goods' production. A tax on a negative externality is called a Pigovian tax, and should equal the marginal damage costs. 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 rest of the economy.According to the scientific consensus, the impact of climate change may result in catastrophe and non-marginal 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 also have a non-marginal impact, but not catastrophic. In addition to creating incentives for energy conservation, a carbon tax would put renewable energy sources such as wind, solar and geothermal on a more competitive footing, stimulating their growth. David Gordon Wilson first proposed a carbon tax in 1973.