Carbon Tax

What Is a Carbon Tax?

A carbon tax is paid by businesses and industries that produce carbon dioxide through their operations. The tax is designed to reduce the output of greenhouse gases and carbon dioxide, a colorless and odorless incombustible gas, into the atmosphere. The tax is imposed with the goal of environmental protection.

Understanding the Carbon Tax

A tax designed to mitigate or remove the negative externalities of carbon emission, a carbon tax is a type of Pigouvian tax. Carbon is found in every kind of hydrocarbon fuel (including coal, petroleum, and natural gas) and is released as the harmful toxin carbon dioxide (CO2) when this kind of fuel is burned. CO2 is the compound primarily responsible for the "greenhouse" effect of trapping heat within the Earth's atmosphere, and is, therefore, one of the primary causes of global warming.

A carbon tax is a type of Pigouvian tax, meaning a tax that businesses or individuals must pay due to engaging in activities that cause adverse side effects for society.

Government Regulation

A carbon tax is also referred to as a form of carbon pricing on greenhouse gas emissions where a fixed price is set by the government for carbon emissions in certain sectors. The price is passed through from businesses to consumers. By increasing the cost of greenhouse emissions, governments hope to curb consumption, reduce the demand for fossil fuels, and push more companies toward creating environmentally-friendly substitutes. A carbon tax is a way for a state to exert some control over carbon emissions without resorting to the levers of a command economy, by which the state could control the means of production and manually halt carbon emissions.

Implementing a Carbon Tax

Any carbon found in manufactured products like plastics that is not burned is not taxed. The same applies to any CO2 that is permanently isolated from production and is not released into the atmosphere. But the tax is paid during the upstream process, or when the fuel or gas is extracted from the Earth. Producers can then pass on the tax to the market by as much as they can. This, in turn, gives consumers a chance to reduce their own carbon footprints. 

Examples of Carbon Taxes

Carbon taxes have been implemented in a number of countries around the world. They take several different forms, but most amount to a straightforward rate of taxation per ton of hydrocarbon fuel used. The first country to implement a carbon tax was Finland, in 1990. As of April 2021, that levy stood at $73.02 per ton of carbon. The Finns were quickly followed by other Nordic countries —  Sweden and Norway both implemented their own carbon taxes in 1991. At a rate of $69.00 per ton of CO2 used in gasoline, the Norwegian tax is among the most stringent in the world. 

The United States doesn't currently implement a federal carbon tax.

Failed Carbon Taxes

Most forms of carbon taxation have been deployed successfully, but Australia's failed attempt from 2012-2014 stands in stark contrast. The minority Green party was able to broker the carbon tax during a period of political stagnation in 2011, but the tax never garnered the support of either of the main parties in Australia, the left-leaning Labor Party (which reluctantly agreed to the tax to form a government with the Greens) and the center-right Liberals, whose leader Tony Abbott spearheaded the 2014 repeal. Like most economic initiatives to combat climate change, carbon taxes remain highly controversial.