Carbon Taxes: Would They Work?

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​The fact that human-induced emissions have largely contributed to climate change, is overwhelmingly endorsed by researchers and scientists.  This has led countries to introduce and implement stringent environmental regulations and taxes. The ever-present emissions of greenhouse gases are expanding planetary temperature graphs, thawing glaciers and permafrost, changing atmospheric circulations and precipitation patterns, increasing sea-levels, washing out coral reefs, and affecting flora and fauna biodiversity in terrestrial as well as aquatic ecosystems.

​These changes in environmental processes are responsible for the collateral damage of the infrastructure, the agricultural productivity, and the economy. However, these socio-economic costs are not considered in the prices for energy commodities. Thus, legislations like the carbon dividend act are the blueprint to mitigate the looming climate crisis. Carbon pricing provides strong market incentives for emission reductions and alternative energy resources.

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What is a Carbon Tax?

​Carbon Pricing reflects the environmental cost of the burned carbon. Carbon is the fundamental component of every substance on earth and it is most abundantly released in the atmosphere as CO2. 
The carbon tax was introduced as a fee that was imposed by the government on carbon emissions from fossil fuel combustion or any other energy-related emissions, proposed in The Energy Innovation and Carbon Dividend Act. It was introduced in the House on November 27, 2018, as H.R. 7173. 

The energy-related carbon emissions have a share of about 76.1% of total U.S. Greenhouse gas emissions in 2017.

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The carbon tax is the prototypical example of a “Pigouvian tax”; a tax that businesses or individuals pay for the mitigation of all the externalities due to carbon emissions. Carbon tax internalizes the cost of environmental damage. It ensures that the full cost (including the external cost to the environment) is being paid by the responsible consumers and companies. Putting a price on emissions; 
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1. Discourages the unconscious use of fossil fuels by the carbon-intensive industrial units, businesses, and households; making them a luxury,
2. Increases the prices of the gasoline and ultimately electricity; thus, fueling the economic growth towards the low-carbon or clean alternatives to avoid the heavy taxes;
3. Reduce greenhouse gas emissions for the stabilization of the climate. 

It is also applicable to carbon-intensive imported goods. Carbon tax generates the federal revenue that is rebated back to the taxpayers.

Carbon Chemistry & Carbon Tax

​The combustion of fossil fuels generates carbon that is oxidized into CO2. The carbon chemistry is simple. The amount of carbon dioxide released is equivalent to the carbon content of the fuel. Coal is the most carbon-intensive of all. For the same amount of energy, coal (Anthracite) releases about 230 million Btu's of carbon dioxide compared to 160 million Btu's of gasoline and 120 million Btu's of natural gas.

Thus, a heavy tax is levied on gasoline as compared to natural gas. This increases the gasoline and subsequently the energy prices. According to the U.S Interagency Working Group on Social Costs of Carbon tax, a price of $40 per metric ton of carbon would result in 36 cent increase in gasoline price. That, in turn, increases the average price of a kilowatt-hour of electricity by 2 cents.
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About 64 governments around the world have developed a system for carbon pricing to meet the Paris Agreement goals. These initiatives are bound to cover 12GtCO2 (about 23%) of global GHG emissions.  Among European Countries, Finland was the first to impose a carbon tax in 1990. It is currently charging $25 per ton of emissions. Sweden and Norway followed the trend in 1991. In Sweden, the carbon tax helped reduce emissions by 27% and increase the economy by 83%. Norway has the stringent/highest carbon tax in the world, $51 per ton of CO2 from gasoline. The carbon emissions of the United Kingdom have reached its lowest limits due to a carbon tax of 18 pounds per ton. Eleven states of the U.S that include New York, California, Delaware, Maine, Massachusetts, New Hampshire, Maryland, New Jersey, Rhode Island, Vermont, and Connecticut have capped their emissions through Cap and Trade programs as well.

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​Why We Need a Carbon Tax

​According to IPCC AR5 that provides a snapshot of climate change, we need to transition from high-polluting carbon-intensive fuels to renewable energy in order to limit warming below 1.5 degrees Celsius. And yet, the carbon emissions are on the rise in the United States. The U.S. Energy Information Agency (EIA) estimated the energy-related carbon to be 5,217 million metric tons in 2019. Presently, various policies have estimated the emissions to be 22% below the 2005 levels by 2025. Carbon pricing can help reduce the emissions further to meet climate goals.

One way to cut down these emissions is through carbon taxation—setting a price on every ton of greenhouse gas released, thereby making cleaner fuel or energy alternatives economically competitive. This environmental tax is different from other taxes, i.e. income tax. Based on Polluter Pay Principle, it is charged as an incentive to bring down emissions and to account for the social cost of carbon. 
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Levying a fee on per ton emissions from fossil fuels not only holds the businesses or individuals accountable for the discharges but also discourages the carbon-intensive behavior. The inflated price, however, is passed from businesses to consumers by increased prices of manufactured goods. It reflects that the consumers and households would pay more for the daily life commodities with increased emissions. This spurs the investments towards renewable and clean technologies, i.e solar panels, hybrid or electric cars, etc, in order to avoid exorbitant carbon taxes. 

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​Carbon Tax Vs Cap & Trade

​Most people compare the Carbon Tax with Emission Trade System or Cap-and-Trade System. Both are forms of carbon pricing. A lobby of scientists, researchers, economists, as well as businesses favors carbon pricing. 

Where the carbon tax directly places a price for per ton of greenhouse gases (particularly carbon) emission, the cap and trade model provides emissions allowances per year. There are valid reasons to choose between either as each plays a pivotal role in reducing emissions. However, each has a distinct advantage over the other.  
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With a cap and trade system, industries with low emission outputs can sell their allowances to emission-intensive companies. This sets a market value for the emissions based on supply and demand. It ensures meeting the pre-defined emission target whereas the carbon tax offers a stable pricing method. While the carbon tax dismisses the uncertainties about price fluctuations, it doesn’t ensure a certain reduction in emission level.

Carbon Tax Revenue & Regression

​The carbon tax applies only to burned carbon; not to the stored or packed-carbon. It is administered upstream. By upstream, it means they are imposed at businesses involved in coal extraction, petroleum refineries, or import of petroleum goods into the U.S. 

A carbon tax is a consumption-based tax. The estimation of the cost per ton of emissions is a prerequisite for the implementation of the carbon tax. This demands economists and scientists to sit at a single table. As per the 2018 United Nation report, carbon prices should be high enough; $135 to $6000 to limit the carbon emissions and global temperature rise below 1.5 degree Celsius by 2030. Tax Foundation estimates that a $50 carbon tax with a 5% growth rate on all energy-related carbon releases would generate revenue of $1.87 trillion in the next decade.  This way, the government can exert some control over emissions as well as generate lucrative revenue to invest in clean energy and infrastructural innovations. This, however, reduces the after-tax wages and incentive to work thereby reducing the GDP by 0.4%.  That is why it is considered regressive. 
 
It has set the same carbon price for gasoline, electricity, and other carbon-based services for all economic classes of consumers. For major businesses, particularly oil companies like ExxonMobil, paying $40 per ton of emissions is not a big deal if it frees their hundred-billion-dollar fossil-based business off Environmental Regulations.

The disproportionate burden falls on low-income households. A large proportion of carbon-intensive emissions come from these communities. Thus, a bigger share of their wages goes to sky-high prices of commodities like electricity, transportation, and individual carbon taxes from their minimum wages.  This way, they cannot be incentivized to switch to expensive energy-efficient resources. 
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In a study, Grainger and Charles D. Kolstad divided a population into five income quintiles from lowest to highest income. The study concluded that two of the low-income households spent more on energy compared to others. But national-level emissions reflect that even though a small budget is spent on energy in the wealthiest households, emissions are still 15% higher than the low-income households. The study concludes that reducing the carbon price would benefit the upper quintiles more than the lower ones. 

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​How Would a Carbon Tax Work?

​How the government deals with the revenue can turn the carbon taxation into a progressive approach. This regression can be reversed with appropriate policy-designs. This amount can be;
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1. Revenue-neutral tax can be returned to Americans as “Citizen’s Dividends”. The Climate Leadership Council proposes a dividend that would return the revenue of the tax to each American family.
2. Or it can be used to maintain industry competitiveness. 

A carbon tax is one of many low-carbon pathways to beat regressive climate change. But it should not push individuals into poverty. Rebating the federal revenue to each household as a lump-sum dividend would fund about $1057 per capita. A carbon tax paired with corporate-tax cuts or lump-sum rebates increases the after-tax wages but impacts output negatively. Thus, pairing it with payroll-tax cuts is the progressive solution as it increases the after-tax income of four of the bottom quintiles between 0.2% and 0.4%.

Stringent regulations and upward tax fees can help reduce the emissions if the initial reductions are too low. With well-designed policies and subsidized cleaner technologies, the emissions could fall beyond the predicted levels. At the current climate trajectory, curbing emissions through taxes is not enough.  We have to sequester the already released carbon from the atmosphere. Governments must implement a carbon tax in conjunction with other incentives to bring out a significant impact, like the subsidies on electric vehicles, solar, wind, and hydropower which encourages the switch from gasoline-powered economy to renewable ones.  
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The bottom line is that greenhouse gas or carbon emissions now have a price attached. Carbon tax combined with optimized policy design, energy-efficient innovations, and stringent environmental regulations can make a difference. 

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Author

Nida Riaz is a freelance blogger based in Pakistan. She started writing about her passion for the environment when the world came to a stop in early 2020.

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