Carbon Tax: What are the Pros and Cons?

by Charlie

Governments can charge a carbon tax on companies and individuals for the carbon dioxide (CO2) they emit.1 The amount of CO2 emitted determines the cost of the penalty.2 Pros of a tax on carbon include increasing the cost of carbon-emitting fossil fuels.3 This provides an incentive to use clean alternatives, thereby reducing our carbon footprint.4 However, critics argue that companies find loopholes to avoid paying and so low-income consumers bear the brunt of higher prices.5

What are the benefits?

The principal benefit of a carbon tax is the reduction in the use of fossil fuels which release CO2 when burned.6 The most important “long-lived ‘forcing’ of climate change” is the increase of CO2 in the Earth’s atmosphere.7 A carbon tax provides a powerful economic incentive to switch to renewable energy sources.8 Through encouraging consumers to switch to green energy alternatives, it would give this sector a significant boost.9 It simultaneously motivates businesses to invest in more energy-efficient processes.10 In short, carbon taxing can stimulate efforts to reduce carbon emissions across society.

A carbon tax also generates funds for the government, which can then be used to develop clean fuels.11 The US could raise at least USD $120 billion annually in this way.12 With the revenue gained, it could greatly improve the cost and attractiveness of wind, solar and hydropower.13 Policy could also direct a proportion of this money to the public to offset hardships caused by the tax.14 

What are the disadvantages?

There are disadvantages to carbon taxing too. If a country imposes such a tax, businesses may outsource production to jurisdictions with less stringent rules.15 A country with a carbon tax may therefore lose jobs and resources as a result.16 The company responsible for producing the CO2 would avoid the tax, but their consumers would not.17 One potential solution could be a global carbon tax. However, this risks contracting economic activity in developing nations where companies cannot afford the same prices as developed world competitors.18

Just as a global carbon tax can inadvertently undermine companies in poorer countries, it is also liable to affect low-income households disproportionately.19 Economically deprived families and individuals spend a higher percentage of their income on essentials such as fuel.20 The most vulnerable people may be at risk of shouldering the burden of such a tax.21 It is, therefore, imperative that any policy involving a carbon tax considers this and provides appropriate support.

Is a tax on carbon a feasible option?

Taxing carbon can be a viable option to reduce greenhouse gases. A UK tax charging £18 tax per ton of CO2 emitted in producing electricity22 reduced fossil fuel use by 2.6%.23 It also drove a 19% decline in coal use.24 However, for it to be effective, it must use a carbon tax in conjunction with other measures.25 In particular, measures need to be in place to protect vulnerable people from paying higher prices for necessities.26 Investment must also be made into renewable alternatives to make them price competitive with fossil fuels and encourage greater uptake among consumers.27

For a similar article, please see here.

Carbon Tax

Sources

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  2. Anon, (n.d.). Carbon (CO2) Emissions Tax Explained - Pros & Cons, Alternatives. [online] Available at: https://www.moneycrashers.com/carbon-co2-emissions-tax/ [Accessed 15 Jan. 2021].
  3. Anon, (n.d.). Carbon (CO2) Emissions Tax Explained - Pros & Cons, Alternatives. [online] Available at: https://www.moneycrashers.com/carbon-co2-emissions-tax/ [Accessed 15 Jan. 2021].
  4. Anon, (n.d.). Carbon (CO2) Emissions Tax Explained - Pros & Cons, Alternatives. [online] Available at: https://www.moneycrashers.com/carbon-co2-emissions-tax/ [Accessed 15 Jan. 2021].
  5. FutureofWorking.com. (2017). 8 Advantages and Disadvantages of the Carbon Tax. [online] Available at: https://futureofworking.com/8-advantages-and-disadvantages-of-the-carbon-tax/.
  6. Bechervaise, C. (2020). Save the Earth: Weighing Up Carbon Tax Pros and Cons. [online] Take It Personel-ly. Available at: https://takeitpersonelly.com/2020/04/22/save-the-earth-weighing-up-carbon-tax-pros-and-cons/ [Accessed 15 Jan. 2021].
  7. NASA (2018). The Causes of Climate Change. [online] Climate Change: Vital Signs of the Planet. Available at: https://climate.nasa.gov/causes/.
  8. E&C. (2020). 27 Main Pros & Cons Of Carbon Taxes. [online] Available at: https://environmental-conscience.com/carbon-tax-pros-cons-alternatives/.
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  11. Anon, (n.d.). Carbon (CO2) Emissions Tax Explained - Pros & Cons, Alternatives. [online] Available at: https://www.moneycrashers.com/carbon-co2-emissions-tax/.
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  14. Griffin, P. (2018). Taxing carbon might sound good, but does it work? Know the pros and cons. Business Standard India. [online] 16 Oct. Available at: https://www.business-standard.com/article/current-affairs/taxing-carbon-might-sound-good-but-does-it-work-know-the-pros-and-cons-118101600103_1.html [Accessed 15 Jan. 2021].
  15. Tejvan Pettinger (2017). Carbon Tax – Pros and Cons | Economics  Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/2207/economics/carbon-tax-pros-and-cons/.
  16. FutureofWorking.com. (2017). 8 Advantages and Disadvantages of the Carbon Tax. [online] Available at: https://futureofworking.com/8-advantages-and-disadvantages-of-the-carbon-tax/.
  17. FutureofWorking.com. (2017). 8 Advantages and Disadvantages of the Carbon Tax. [online] Available at: https://futureofworking.com/8-advantages-and-disadvantages-of-the-carbon-tax/.
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  19. Bechervaise, C. (2020). Save the Earth: Weighing Up Carbon Tax Pros and Cons. [online] Take It Personel-ly. Available at: https://takeitpersonelly.com/2020/04/22/save-the-earth-weighing-up-carbon-tax-pros-and-cons/.
  20. Bechervaise, C. (2020). Save the Earth: Weighing Up Carbon Tax Pros and Cons. [online] Take It Personel-ly. Available at: https://takeitpersonelly.com/2020/04/22/save-the-earth-weighing-up-carbon-tax-pros-and-cons/.
  21. Bechervaise, C. (2020). Save the Earth: Weighing Up Carbon Tax Pros and Cons. [online] Take It Personel-ly. Available at: https://takeitpersonelly.com/2020/04/22/save-the-earth-weighing-up-carbon-tax-pros-and-cons/.
  22. Akshat Rathi (2018). UK carbon tax: It killed off coal, and natural gas is next. [online] Quartz. Available at: https://qz.com/1192753/a-carbon-tax-killed-coal-in-the-uk-natural-gas-is-next/.
  23. Carbon Brief. (2018). Analysis: UK carbon emissions in 2017 fell to levels last seen in 1890 | Carbon Brief. [online] Available at: https://www.carbonbrief.org/analysis-uk-carbon-emissions-in-2017-fell-to-levels-last-seen-in-1890.
  24. Carbon Brief. (2018). Analysis: UK carbon emissions in 2017 fell to levels last seen in 1890 | Carbon Brief. [online] Available at: https://www.carbonbrief.org/analysis-uk-carbon-emissions-in-2017-fell-to-levels-last-seen-in-1890.
  25. Amadeo, K. (2018). Carbon Tax, Its Purpose, and How It Works. [online] The Balance. Available at: https://www.thebalance.com/carbon-tax-definition-how-it-works-4158043.
  26. Bechervaise, C. (2020). Save the Earth: Weighing Up Carbon Tax Pros and Cons. [online] Take It Personel-ly. Available at: https://takeitpersonelly.com/2020/04/22/save-the-earth-weighing-up-carbon-tax-pros-and-cons/.
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