A carbon tax is a tax on energy sources which emit carbon
dioxide. It is a pollution tax, which some economists favour
because they tax a 'bad' rather than a 'good' (such as income).
Carbon taxes address a negative externality. Externalities arise
when an individual production or consumption activity imposes costs
or benefits on others. In market transactions, these costs and
benefits are not normally reflected in the prices involved in the
transaction, or taken into account in the transaction decision.
By placing a cost on these negative externalities the underlying
purpose of a carbon tax is to reduce emissions of carbon dioxide
and thereby slow global warming. It can be implemented by taxing
the burning of fossil fuels—coal, petroleum products such as
petrol and aviation fuel, and natural gas—in proportion to
their carbon content.
There is some political support for a carbon tax in Australia as
a means of implementing a carbon price. Some groups favour this
approach as an interim step on the way to an Australian emissions
trading scheme. The Howard Government's taskforce that examined
options for dealing with climate change, and the more recent
Garnaut Climate Change Review, rejected carbon taxes in favour of
an emissions trading
Pros and Cons
Carbon taxes have been said to have the following
They put a limit on the costs of emissions reduction.
They can be implemented quickly.
They are predictable in their costs. Relatively stable price
signals can help business and consumers plan energy spending and
provide greater certainty for investments in energy efficiency that
have large initial costs.
They are a permanent incentive to reduce emissions. The price
of pollutants does not change, as with the operation of a
market-based emission trading system.
They are not susceptible to 'strategic behaviour' by firms and
non-government organisations that distort any market for trading
emissions—such as purchasing a large number of permits and
reselling them later at a profit or viewing auction permits in a
cap-and-trade system as a right to pollute.
They are economically efficient in that they are transparent,
simple and can have a wide coverage.
They can be implemented across a wide variety of economies and
therefore are a suitable instrument for coordinated international
action on reducing greenhouse gas emissions.
They are a revenue source. They could result in other taxes
being reduced, or the proceeds of the carbon tax could
be redirected to those most affected to ensure that the
introduction of a carbon tax remains revenue neutral.
For these reasons a number of prominent economists support the
introduction of such taxes. However, carbon taxes as a means of
controlling greenhouse gas emissions also have some
- There are no guarantees that emissions will decline if
consumption of the goods and services that produce carbon emissions
remains unresponsive to price increases.
- The level at which the tax is set to produce the best outcomes
cannot be known in advance. Thus the tax may have to go through
several changes before having the desired effect. This makes it
- Where such taxes have been implemented (mainly in Europe) lobby
groups have been successful in gaining exemptions for highly
affected industries. This reduces the effectiveness of these
- If the tax is set at too high a level, activities that are
particularly vulnerable to it may relocate to a location that does
not have such imposts.
- To date it has not received much support as the internationally
preferred method of controlling greenhouse gas emissions. To date
the international community appears to prefer the cap-and-trade
- They are potentially regressive, with the impact of a flat
carbon tax potentially highest on the lowest income households.
This effect is offset by the higher consumption of wealthier
households, that is, as they consume relatively more energy than
low income households they may be paying a higher rate of tax.
- It is a tax, and therefore politically unpopular by its very
It is likely that a carbon tax that is successful in reducing
emissions will be set at far too high a level to be political
sustainable. This is because the activities on which a tax must be
levied to reduce emissions (such as emissions from coal-fired power
generation) are linked to goods and services that the consumer
simply will not do without (such as electricity). The political
pressure arising from higher electricity prices due to the
imposition of a carbon tax could swiftly lead to the reduction or
removal of that tax.
International carbon taxes
According to the Carbon
Tax Centre, the first carbon tax was enacted in
Finland in 1990, with a small tax on fuels (except for biofuels
Norway, Sweden, and
Denmark followed, implementing carbon taxes in 1991 and
Germany implemented an 'ecological tax' on heating fuel, petrol,
natural gas and electricity in 1999. The tax was slowly increased
from 2000 to 2003 and now remains at 2003 levels.
In 1999, Luxembourg began an electricity tax and an energy tax
with breaks for businesses that undergo voluntary energy or
environmental audits and demonstrate other efforts to increase
In 2001, Japan enacted a tax on
high-polluting vehicles while reducing the tax on low-pollution
vehicles to encourage the development and purchase of greener
vehicles. Japan also restructured its energy taxes to reflect the
environmental impact of carbon dioxide emissions, including a new
tax on coal.
United Kingdom implemented a 'climate change levy' in 2001 that
adds about 15 per cent to the cost of electricity. The
revenues are recycled by reducing the National Insurance
contributions of those who pay the levy. Part of the revenue is
also used to assist businesses adopt energy efficiency
Hungary has introduced a New Environmental Burden Tariff, phased
in since 2004, that taxes pollution of the soil, air, and water,
including carbon dioxide emissions.
T. Shrum, Green house gas emissions—policy and
economics, Kansas Energy Council, 3 August 2007.
Carbon Tax Centre, Why revenue-neutral carbon taxes
are essential, what's happening now and how you can help,
Carbon Tax Centre, 2007.