A carbon tax is a fee levied on consumers of fossil fuels. The tax is designed to force consumers to pay for climate destruction their fuel use causes by disseminating carbon dioxide into the atmosphere. When fossil fuels are burned for consumption, they emit carbon dioxide, which accumulates in the atmosphere. The accumulation of carbon dioxide in the atmosphere traps re- radiated heat from the Earth's surface, causing global temperatures to increase. Fossil fuels are the primary driver of anthropogenic climate change. Such change leads to myriad consequences, such as natural disasters and widespread drought, that have cost countries billions of dollars and endangered large portions of the world's population. Therefore, many countries have implemented, or are in the process of implementing, a carbon tax. A carbon tax has two components: the source, which is the tax itself, and the use, which is what to do with the revenues. There are two major approaches to carbon tax revenue use. One is the economical approach that uses the revenues to refund the public through tax rebates. The other is using the revenue to fund renewable energy programs such as solar power. [1]
A carbon tax affects not just producers, but also consumers who buy products and goods from carbon-intensive industries. With higher prices on carbon, the demand for carbon-intensive products decreases. As a result, industries produce fewer goods and gain less profit. In order to account for this loss, industries cut returns on capital, labor wages, and prices of other inputs in productions. These cuts reduce the incentive to work, save, and invest, lowering GDP levels and employment. [2]
Adopting a revenue-neutral carbon tax with revenues refunded to the public through tax rebate checks offsets the economic drag. This approach prevents the government from keeping the revenues. The carbon tax revenues are returned to taxpayers through rebate checks. Although gas prices increase, the demand does not completely drop off because taxpayers can use their proportionate revenue to offset the higher gas prices. As a result, fossil fuel producers are not adversely affected and GDP levels and employment remain stable. [3]
The environmental approach uses revenue to fund solar energy in an attempt to offset the social cost of carbon. Increased carbon dioxide emissions have directly affected economies by increasing healthcare prices and property damages from natural disasters and increased flood risk. Using carbon tax revenue to fund solar power is not favorable in the short term because the revenue is not being refunded through rebate checks. However, this revenue use provides sufficient macroeconomic gains by offsetting the social cost of carbon. Also, funding solar energy further reduces carbon dioxide emissions, which is the paramount goal of the tax. [4]
While the economic approach seems fitting in the short term, the environmental approach indirectly boosts countries' economies by saving billions of dollars and further diminishing anthropogenic climate change in the long term.
© Jack Jones. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] D. Amdur, B. G. Rabe, and C. Borick, "Public Views on a Carbon Tax Depend on the Proposed Use of Revenue, Gerald R. Ford School of Public Policy, University of Michican, July 2014.
[2] J. C. Carbone et al., "Deficit Reduction and Carbon Taxes: Budgetary, Economic, and Distributional Impacts," Resources For the Future, August 2013.
[3] S.-L. Hsu, The Case for a Carbon Tax: Getting Past Our Hang-ups to Effective Climate Policy (Island Press, 2011).
[4] I. Parry, A. Morris, and R. C. Williams III, eds., Implementing a US Carbon Tax: Challenges and Debates (Routledge, 2015).