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What are Carbon Taxes?

Mary McMahon
Updated May 23, 2024
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Carbon taxes are taxes which are applied to fuels that generate carbon emissions as they create energy. Several nations use carbon taxes as an attempt to encourage businesses to pursue alternative fuels and to promote environmental consciousness, and some economists have proposed that more countries around the world should create a carbon tax framework. The rise of awareness about carbon taxes illustrates a general global interest in environmental issues and a desire by consumers to correct environmental problems caused by industry.

Different fuels contain varying amounts of carbon, and carbon taxes are designed to be very precise. Essentially, a nation places a set tax on a certain volume emission of carbon. Since the carbon emission rates of fossil fuels are known, when these fuels are sold, a carbon tax can be built into the sale, with the price of the tax varying depending on how clean the fuel is.

The primary advantage of carbon taxes is that they raise awareness about environmental issues, and they push companies to pursue more environmentally friendly methods of energy generation. Essentially, they constitute a mild punishment for using unclean fuels, and since most companies are concerned about their bottom line, these companies may pursue cleaner fuels in lieu of having to propose a price hike which might anger their customers.

Carbon emissions are an example of what is known as a negative externality in economics. A negative externality affects people who are outside of a transaction. For example, many people believe that second hand smoke is harmful, making cigarettes another case of a negative externality; when someone purchases a pack of cigarettes and lights up, people who were not involved in the purchase may suffer as a result of second hand smoke exposure.

Some economists support taxes on negative externalities such as pollution because they encourage companies to seek out cleaner operating methods and they provide a fund which can be used for environmental restoration, education, and similar work. Consumers can also appreciate a tax on energy sources when they see the benefits of that tax in the form of government investment in alternative fuels, or a proliferation of cleaner technologies.

Economists also point out that carbon taxes levy a fee on pollution, something which is considered bad, rather than income, which is generally viewed as positive. Taxes which target negative externalities are known as Pigovian taxes, after Arthur Pigou, a French economist who proposed a taxation system to correct or compensate for such externalities.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a CulturalWorld.org researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By David09 — On Nov 17, 2011

@NathanG - I share your views on the carbon tax credit in general, but I do believe that carbon emissions deserve some panelty.

Further, people who reduce their carbon emissions should be rewarded in my opinion. We are in a free market economy and I think that there is nothing wrong with incentives for good behavior.

I’ll stop short of saying we need to trade carbon tax credits like baseball cards, but I think that people who buy energy efficient appliances should qualify for credits on their tax returns. That is something that is fair, and not subject to corruption, as I see it.

By NathanG — On Nov 17, 2011

@allenJo - I’ll buy into the basic assumptions behind the carbon tax. But one thing that I absolutely can’t stomach is the idea of a carbon tax credit.

This is a credit that individuals or companies can “buy” that will supposedly grant them the right to emit a specified unit of carbon emissions. If we are trying to lower carbon emissions what’s the point of a carbon tax credit?

Worse still, the whole carbon tax credit scheme has become an investment medium, with people buying and selling credits on something called the Carbon Trade Exchange. I’m sorry, the whole thing is laughable, and is eerily reminiscent of the ancient religious practice of buying and selling “indulgences” as advance remission on your personal sins.

If you’re going to reduce your carbon footprint, then reduce it, but don’t look for environmental waivers and tell me that you care about global warming.

By allenJo — On Nov 16, 2011

@miriam98 - Well, I can’t say that I share your cynicism. I believe that the carbon tax does act as a deterrent.

No, politicians do not need revenue from this tax. They generate revenue from other means, like the income tax. I hardly think the carbon tax is bringing the windfall revenue stream that you think it is.

And as proof that the deterrent seems to be working, I think the major carbon producers, like oil companies, are taking notice. They are working to reduce their carbon footprint and are also engaging in research and development of alternative fuels.

I believe the carbon tax has played a big role in bringing about this change. I am usually not a fan of taxes in any way, shape or form, but this is one tax that I believe should stay in place until we become totally energy independent.

By miriam98 — On Nov 15, 2011

I am not in favor of carbon tax assessments. To me they are simply one more example of the government looking for ways to generate additional revenue.

Seriously, do you think our politicians would be deliriously happy if companies drastically reduced carbon emissions, thereby drastically reducing the carbon taxes in the process?

I think the opposite reaction would occur. They would fret that their carbon tax revenue had plummeted and they would rush to find some other way of generating revenue, even in a green economy.

It’s like the “sin tax” on cigarettes and alcohol. Do we really need such a tax, and if alcohol and cigarette consumption dropped, would the pollutions be happy? I seriously doubt it.

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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