Carbon Tax: What are the Pros and Cons?

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

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