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, 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 for mitigating the looming climate crisis. Carbon pricing provides strong market incentives for emission reductions and alternative energy resources.
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 imposed by the government on carbon emissions from fossil fuel combustion or any other energy-related emissions, proposed in Energy Innovation and Carbon Dividend Act. It was introduced in the House on November 27, 2018, as H.R. 7173.
The carbon tax is the prototypical example of a “ Pigouvian tax,”; a tax that businesses or individuals pay to mitigate 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;
- Discourages the unconscious use of fossil fuels by the carbon-intensive industrial units, businesses, and households; making them a luxury,
- 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;
- Reduce greenhouse gas emissions for the stabilization of the climate.
It is also applicable to carbon-intensive 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 than 160 million Btu’s of gasoline and 120 million Btu’s 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.
About 64 governments worldwide 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 globally, $51 per ton of CO2 from gasoline. The United Kingdom's carbon emissions have reached their 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.
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 to limit warming below 1.5 degrees Celsius. And yet, 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 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 account for carbon's social cost.
Levying a fee on per ton emissions from fossil fuels holds the businesses or individuals accountable for the discharges and 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., to avoid exorbitant carbon taxes.
Read on to find the difference between Carbon Tax and Cap and Trade and how it would work at https://www.conservationmadesimple.org.
