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What is a carbon tax?
A carbon tax is a tax or fee levied on the carbon content of fuels1 or a tax based on the greenhouse gas emissions generated by burning fuels.2 In practical terms, it is “fee imposed on the production, distribution or use of fossil fuels, based on how much carbon their combustion emits.”3 Carbon fee or taxes are policy measures to internalize the negative externalities i.e. costs to society and future generations – as a result of global warming and climate change – that are not incorporated in the price of fossil fuels. They are aimed at changing consumer behaviour3 as it “forces individuals to consider the full set of consequences from emissions.”4
There are important considerations when designing a carbon tax including (a) the tax rate, (b) the tax base, and (c) issues relating to international trade.4
Tax rate: In theory, the rate should be equal to the marginal cost of greenhouse gas emissions; however, in practice the marginal cost is hard to estimate. This is further complicated by the fact that the rate should change as new information on the costs and benefits of reducing emissions becomes available.4
Tax base: For the tax base, it has been shown that upstream collection of taxes i.e. at the well head, port, etc. can be accurate and relatively inexpensive.4 In the US, 80% of its emissions can be covered by collecting a carbon tax at 3000 points, and 90% of emissions can be covered with a modest additional cost.4
Border tax adjustment: Carbon pricing may impact competitiveness of industries - some positively, and some negatively - because of the the potential extra cost of production for those firms. If foreign firms are not subjected to similar costs, domestic firms could be negatively impacted, and, if production shifts to jurisdictions without a carbon tax, “carbon leakage” may occur. A border tax adjustment could prevent carbon leakage.4
Four other features of carbon tax are noteworthy for a successful implementation including broad coverage, revenue neutrality, protection of families, and phased implementation.5,6 And more importantly, the carbon fee should increase each year at a rate that will enable us to meet set emission reduction targets.
In the absence of appropriate measures or design, a carbon tax is expected to be regressive in nature meaning that it disproportionately affects the poor and low-income households because they spend a larger proportion of the income on energy. This can be eased by providing tax breaks or dividends to individuals and households.
Revenues from a carbon tax:
Depending on the design of the carbon fee i.e. incorporation of tax exemptions, a carbon tax is expected to raise significant revenues. A carbon fee of $30/ton is expected to raise revenue of $21 billion a year based on GHG emissions of 700 million tons of CO2 equivalent.7,8
Use of carbon fee revenues:
The revenue raised from a carbon tax could be used
for investing in renewable energy
to provide tax breaks to individuals and corporations (if it is used in its entirety for this purpose, the carbon tax would be revenue neutral)
to provide dividends to households as advocated by the Citizens Climate Lobby.
Where carbon taxes have been implemented:
Carbon taxes have been implemented in many jurisdictions around the world including Australia, British Columbia, Finland, Ireland, and Sweden.9,10
1. Holler, P. & Wallin, M. Energy prices, taxes and carbon dioxide emissions. (Organisation for Economic Co-operation and Development, 1991). at http://www.oecd.org/eco/greeneco/34258255.pdf
2. Ministry of Finance, Govt. of British Columbia,. What is a carbon tax? (2012). at http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm
3. UN Economic and Social Commission for Asia and the Pacific. Climate-smart trade and investment in Asia and the Pacific. Toward a triple-win outcome. (UN Economic and Social Commission for Asia and the Pacific, 2011). at http://www.unescap.org/tid/publication/tipub2614.pdf
4. Metcalf, G. & Weisbach, D. Design of a Carbon Tax. (Social Science Research Network, 2009). at http://papers.ssrn.com/abstract=1324854
5. Durning, A. More on B.C.’s carbon tax shift. Grist at http://grist.org/article/oh-canada1/
6. British Columbia Ministry of Finance. Budget and Fiscal Plan 2008/09 – 2010/11. (British Columbia Ministry of Finance, 2008). at http://www.bcbudget.gov.bc.ca/2008/bfp/2008_Budget_Fiscal_Plan.pdf
7. Rivers, N. The distribution of costs of a carbon tax among Canadian households. Can Tax J 60, 899–915
8. National Round Table on the Environment and the Economy. Achieving 2050: A Carbon Pricing Policy for Canada – Technical Report. (Ottawa, 2008). at http://collectionscanada.gc.ca/webarchives2/20130322143407/http://nrtee-...
9. Environmental and Energy Study Institute. Fact Sheet: Carbon Pricing around the World | Environmental and Energy Study Institute. (Environmental and Energy Study Institute, 2012). at http://www.eesi.org/fact-sheet-carbon-pricing-around-world-17-oct-2012
10. Kossoy, A., Oppermann, K., Boukerche, S., Reddy, R. C. & Bosi, M. Mapping carbon pricing initiatives : developments and prospects. 1–98 (The World Bank, 2013). at https://openknowledge.worldbank.org/bitstream/handle/10986/15771/77955.pdf