A carbon tax is a tax on energy sources which emit carbon dioxide into the atmosphere. It is an example of pollution taxes, which economists favor because they tax a "bad" rather than a "good" (such as income). Because a carbon tax addresses a negative externality, it is classed as a Pigovian tax, named after Arthur Pigou, who first proposed targeted taxation as a corrective to externalities.
Because of the link with global warming, a carbon tax is sometimes assumed to require an internationally administered scheme; that is not intrinsic to the principle, however. The European Union has discussed a carbon tax covering its member states to supplement the carbon emissions trading scheme begun in January 2005. However, emissions trading systems do not constitute a Pigovian tax insofar as (a) the payment for emissions is not received by a governmental body, and (b) the price per unit of emissions is not fixed as it is in tax systems, rather it is a market price that fluctuates.
Aims
Theoretical background
In economic theory, pollution is considered a negative externality because it has a negative effect on one or more parties not directly involved in a transaction. For instance, a power plant or motor vehicle emitting carbon dioxide would be a source of a negative externality. A negative externality represents part of the social cost of production that is not incorporated into the private cost of producers. As a result, firms would consider it cheaper to pollute than to find other means of production, because not all the costs of production have been "internalized."
To address this problem, Pigou proposed a tax on the good — in this case carbon dioxide — whose production was the source of the negative externality so as to accurately reflect the cost of the good's production to society, thereby internalizing the costs associated with the good's production. A tax on a negative externality is termed a Pigouvian tax.
The carbon tax is an indirect tax — a tax on a transaction — as opposed to a direct tax, which taxes income. As a result, some American conservatives have supported the carbon tax because it taxes at a fixed rate, independent of income, which would dovetail with their support of a flat tax.[1]
Carbon Tax Specifics
The purpose of a carbon tax is environmental, 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 gasoline and aviation fuel, and natural gas — in proportion to their carbon content. Unlike competing market-based approaches such as carbon cap-and-trade systems, little new administrative machinery would be required to administer and levy a carbon tax.
Equity Issues
Any flat tax is regressive, but the regressivity of a carbon tax could be minimized or eliminated by allocating the tax revenues to benefit the less affluent. Wealthier households use more energy, on average — they drive and fly more, have bigger (and sometimes multiple) houses, and buy more products that require energy to manufacture and use. Most carbon tax revenues will therefore come from families of above-average means, as well as corporations and government. This creates a basis for progressive tax-shifting: transferring a portion of the tax burden from regressive taxes such as the payroll tax (at the federal level) and the sales tax (at the state level) onto pollution and pollution-generating activities.
Another progressive approach is to rebate the carbon tax revenues equally to all U.S. residents — a national version of the Alaska Permanent Fund [1], which once a year sends identical checks to all state residents from the state’s North Slope oil royalties. Because income and energy consumption are strongly correlated, most poorer households would get more back in rebates or tax savings than they would pay in the carbon tax.
Border Issues
Concerns have been raised that if the United States implemented a carbon tax, energy-intensive industries would migrate to nations without a carbon tax, some of which might be less energy-efficient than the US. A possible antidote is for carbon-taxing countries to levy carbon-equivalent fees on imports from non-taxing nations. There is also the hope that American leadership through carbon-taxing would be reciprocated by other countries with an equal stake in climate protection.
Implementation
On January 1 1991, Sweden enacted a carbon tax, placing a tax of .25 SEK/kg ($100 per ton) on the use of oil, coal, natural gas, liquefied petroleum gas, petrol, and aviation fuel used in domestic travel. Industrial users paid half the rate (between 1993 and 1997, 25% of the rate), and certain high-energy industries such as commercial horticulture, mining, manufacturing and the pulp and paper industry were fully exempted from these new taxes. In 1997 the rate was raised to .365 SEK/kg ($150 per ton) of CO2 released.[2]
Finland, the Netherlands, and Norway also introduced carbon taxes in the 1990s.
In 2005 New Zealand proposed a carbon tax, setting an emissions price of NZ$15 per tonne of CO2-equivalent. The planned tax was scheduled to take effect from April 2007, and applied across most economic sectors though with an exemption for methane emissions from farming and provisions for special exemptions from carbon intensive businesses if they adopted world's-best-practice standards of emissions. After the 2005 election, the minor parties supporting the Government opposed the proposed tax, and it was abandoned in December 2005.
In 1993, President of the United States, Bill Clinton proposed a BTU tax that was never adopted. His Vice President, Al Gore, had strongly backed a carbon tax in his book, Earth in the Balance, but this became a political liability after Gore's Republican opponents attacked him as a "dangerous fanatic". In 2000, when Gore ran for President, one commentator labeled Gore's carbon tax proposal a "central planning solution" harking back to "the New Deal politics of his father."[1] In April 2005, Paul Anderson, CEO and Chairman of Duke Energy, called for the introduction of a carbon tax.[3] In January 2007, economist Charles Komanoff and attorney Dan Rosenblum launched a Carbon Tax Center[4] to give voice to Americans who believe that taxing carbon emissions is imperative to reduce global warming.
See also
Notes and references
- ^ a b Noah, Timothy (Nov. 9, 2006). The GOP Triangulates. Slate.
External links
- [http:/www.carbontax.org Carbon Tax Center] -- carbon tax policy, issues, FAQ's, blog
- Global Taxes -- analysis by Global Policy Forum
- Energy Taxes -- analysis by Global Policy Forum
- State Carbon Tax Model - downloadable (spreadsheet) model