Carbon Taxes

Introduction

Fig. 1: EIA's predicted carbon emission reductions in the electricity sector based on size of tax. [4] (Courtesy of the U.S. Energy Information Administration)

The scientific community has reached the general conclusion that human activities, specifically those involving the emission of carbon dioxide (CO₂), has contributed to climate change by causing changes to the Earth's atmospheric makeup. In order to reduce the abundance of CO₂ and other greenhouse gases and, in turn, curb the effects of climate changes, experts have developed a number of methods to reduce greenhouse gas emissions.

A Carbon Tax

Carbon taxes are a method of carbon pricing that assigns a price to the level of CO₂ admitted from various processes. A carbon tax can be levied upon emission levels directly or on the fuels that emit CO₂ upon combustion.

Justification

A carbon tax acts as specific kind of Pigovian tax, or in other words, a tax that attempts to assign the proper cost to a market activity that generates a negative externality. [1] Since an excess of greenhouse gases in the Earth's atmosphere has contributed to continued global-warming trends, any activities resulting in the admission of CO₂ has a negative effect on some third party. Climate change is an issue of negative externalities since the market price to produce energy does not include the social cost of the pollution produced.

Economic Benefits

Fig. 2: EIA's predicted total carbon emissions reductions based on size of tax. [4] (Courtesy of the U.S. Energy Information Administration)

Since CO₂ emissions result from a wide array of activities, setting emission limits and other arbitrary mandates limits innovation and threatens legitimate success in curbing emission rates. A carbon tax represents a market-based approach to the problem and incentives both businesses and consumers to cut back on emissions at the lowest cost to them. [2] A carbon tax, unlike any alternatives, establishes the stable, known price of carbon that best stimulates long-term investments in both energy conversation and low-carbon energy sources. [3]

Environmental Benefits

As noted a carbon tax incentives producers and consumers to lower emissions in the most efficient manner. In particular, the Energy Information Administration (EIA) noted that the electricity sector reacts strongly to the implementation of fees on CO₂ admissions. The EIA predicts that a carbon fee could result in a 35% to 89% reduction in CO₂ emission in this sector by 2040 compared to 2005 levels depending on the size of the fee. [4] In terms of the total energy sector, the EIA estimates that a carbon fee could result in somewhere between 18% and 39% reductions from 2005 CO₂ emission levels. [4]

Implementation

As of now, 14 countries and British Columbia have enacted some sort of a carbon tax and act as great models for further implementation. Many of these counties have seen major reduction in their CO₂ emissions and drastic shifts in their energy sectors. For example, both Denmark and Norway saw major shifts from a reliance on oil and coal to an increase in combustible renewables and natural gas after the application of their respective carbon taxes. Also, depending on method of implementation, the revenue from carbon taxes can also be used offset other types of taxes. These revenue neutral schemes, like ones enacted in British Columbia and the United Kingdom, ensure that taxpayers are not overburdened by governmental attempts to curb CO₂ emissions. [2]

Conclusion

Overall, a carbon tax acts as both an economically sound and effective method of curbing greenhouse gas emissions. Enacting carbon tax policies could lead to great strides in mitigating the effects of global warming, and governments should look to these polices as a viable solution to the environmental problems they face.

© Spencer Rogers. 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.

References

[1] D. Helm, "Economic Instruments and Environmental Policy," Econ. Soc. Rev. 36, 205 (2005).

[2] D. Marron, E. Toder, and L. Austin, "Taxing Carbon: What, Why, and How," Tax Policy Center, June 2015.

[3] J. Taylor, "The Conservative Case for a Carbon Tax," Niskanen Center, 23 Mar 15.

[4] "Further Sensitivity Analysis of Hypothetical Policies to Limit Energy-Related Carbon Dioxide Emissions," U.S. Energy Information Administration, July 2013.