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Carbon Taxes: A Complete Guide

Updated: Apr 4

As we all know, the climate is changing and global temperatures are rising. This is due to Greenhouse gas emissions that heat our atmosphere. There are many proposed solutions to reduce global carbon emissions, but an interesting one is the Carbon Tax. A carbon tax is a tax designed to capture the social cost of carbon and hold businesses and consumers accountable for their carbon-emitting behaviors. In this blog, we will explore the carbon tax and how it can impact you as the average person. 


Understanding Carbon Taxes

Carbon Tax supply demand forevergreen Graphic
Credit : Forevergreen Earth INC

Carbon taxes are a type of Pigouvian Tax (any tax that attempts to generate revenue from a negative externality). They are implemented to force businesses to account for their impact on the environment. For example, in a study in Sweden saw a reduction of 11% in the transportation sector when this tax was implemented. The introduction of a carbon tax forced businesses and consumers to switch to more eco-friendly forms of transport due to higher prices in oil and gas. This is slightly different than a cap and trade model where a regulator sets a limit on total emissions or a “cap” and business must comply or purchase allowance credits from other low emitting companies through “trade”. 


The Goals of Carbon Taxes

The goal of carbon taxes or any carbon pricing mechanism is to cost effectively reduce emissions and drive innovation from businesses and consumers to change behavior to avoid the new imposed costs of their environmental impacts. Additionally another advantage of carbon taxes is that they can generate new revenues that can be used towards green projects. A 2017 study estimates a tax of $49 per metric ton of carbon dioxide could raise about $2.2 trillion in net revenues over 10 years from 2019 to 2028. [1] 


How Carbon Taxes Impact You

A carbon tax increases the cost of fossil fuels that emit more carbon encouraging consumers and businesses to switch to other, often cleaner fuels. Although these fuels may be initially more expensive, the higher price induces users to use lower-carbon energy sources, reduce energy use, or use energy more efficiently. [2] With the exponential development of solar and wind energy these can become more cost effective for many homeowners. [3] In a study by the Pew Research Center it was found that (69% of Americans favor the U.S. taking steps to become carbon neutral by 2050, and carbon taxes can be a great way to incentivize the switch. [4] One issue with carbon tax is the financial burden on lower-income households. Since these households spend a disproportionately higher portion of their income on energy this would affect them more directly in the short term. That is where subsidies can play a role for these households to make the switch. These subsidies can be fueled by revenues found from the imposed carbon tax. 


The Global Perspective

Although there is no global carbon tax currently there are at least 70 different and fragmented approaches to carbon pricing around the world, including carbon taxes, emissions trade systems (ETS), and indirect carbon pricing through fuel taxes. [5] A tax on emissions in Great Britain, introduced in 2013, has led to the proportion of electricity generated from coal falling from 40% to 3% over six years, according to research led by UCL. [6] There are many examples worldwide where carbon taxes have led to decreased emissions, but the challenge of national carbon pricing, let alone global still remains. Many economists agree including Matthew Kotchen a Professor of Economics at Yale University that “A carbon tax gets the incentives right ... It is one of the most effective ways to reduce emissions.”


How You Can Make a Difference

With the knowledge that carbon prices are an effective tool to mitigate climate change there is actually alot you can do to aid the movement. Regardless of a carbon tax you can take steps to reduce you overall carbon footprint, we have written a few blogs such as about topics such as reducing energy emissions, transportation emissions, and more. You can also advocate and support initiatives for carbon taxes in the US. It is also important to understand your role in the larger fight against climate change. As an individual you have the power to restrict support for high emitting companies and industries and with Forevergreen, you can offset your individual impact today! 


Conclusion

I hope you learned a little more about carbon taxes and their roles in fighting climate change. They can be a valuable tool to hold businesses accountable for their environmental impact and allow regulators to price in carbon which can be key for decision making. Without tools like these businesses can continue to exploit the natural world at no cost, and we continue the vicious cycle of natural resource depletion. Please check out some of our other blogs on similar topics such as Carbon Cap and Trade or Carbon Pricing. 





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