Carbon Tax

A carbon tax is a Pigovian tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel (coal, petroleum, and natural gas) and is released as carbon dioxide (CO₂) when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not convert hydrocarbons to CO₂. CO₂ is a heat-trapping "greenhouse" gas. Scientists have pointed to the potential effects on the climate system of releasing greenhouse gases (GHGs) into the atmosphere (see scientific opinion on global warming). Since GHG emissions caused by the combustion of fossil fuels are closely related to the carbon content of the respective fuels, a tax on these emissions can be levied 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. They help to address the problem of emitters of greenhouse gases not facing the full (social) costs of their actions. Carbon taxes are a regressive tax, in that they disproportionately affect low-income groups. The regressive nature of carbon taxes can be addressed by using tax revenues to favour low-income groups.

A number of countries have implemented carbon taxes or energy taxes that are related to carbon content. Most environmentally related taxes with implications for greenhouse gas emissions in OECD countries are levied on energy products and motor vehicles, rather than on CO₂ emissions directly.

Opposition to increased environmental regulation such as carbon taxes often centres on concerns that firms might relocate and/or people might lose their jobs. It has been argued, however, that carbon taxes are more efficient than direct regulation and may even lead to higher employment (see footnotes). Many large users of carbon resources in electricity generation, such as the United States, Russia and China, are resisting carbon taxation.