Table of Contents
This is a type of tax applied to the amount of composition of carbon in fuels. Other foundations define it as a tax applied to GHG (greenhouse gas) released to the environment from burning of fuel (Burney 2). Basically, carbon exists in all hydrocarbon fuels and is emitted to the environment as CO2 as a result of combustion. The hydrocarbon fuel includes natural gas, petroleum as well as coal. By contrast, other sources of energy that do not involve burning do not change hydrocarbons into CO2. Releases of GHGs into the atmosphere have been theorized to have a lot of effects, including the global warming, on the environment. Considering that the emission of GHGs is directly proportional to the carbon content of the related fuel, a levy on these emissions can be imposed by counting the carbon content of the fuels at any point of the production chain of the fuel. Carbon tax provides a very convenient means of reduction of GHG emissions by sending out a message that would trigger a response across all sectors of the economy resulting in a reduced emission. Individuals and businesses can reduce or offset the amounts they pay in this form of tax by embracing new technology, using clean fuel, lowering fuel consumption, and improving fuel efficiency (Burney 14). However, there are some challenges associated with the implementation of carbon tax. By reviewing the available literature, the current paper seeks to analyse the challenges associated with the introduction of carbon tax and the ways the governments can address them. Carlbon tax can be an effective tool for reduction of GHG emissions if it is carefully planned.
Literature Review and Discussion
Most nations have depended on fossil fuels, whicgh are needed for the production of electricity and transportation, since the beginning of industrialization. The high combustion of these fuels has resulted in a significant accumulation of CO2 in the atmosphere. CO2 is one of the GHGs that elevate the temperature of the earth’s atmosphere by trapping the heat from the outer space. The scientists have identified the accumulation of CO2 in the atmosphere to be the major cause of global warming. A few degrees rise in the temperature of the atmosphere, so-called global warming, can have a significant impact on the environment such as a rise in the sea-level and water shortage due to the altered patterns of rainfall formation. These small impacts alone can lower the world’s GDP by up to 1% if the emission is left unchecked. The rise in sea-level could affect various economic and social infrastructures while the altered precipitation patterns could permanently change the ecosystem negatively.
Following the warning by the IPCC (Intergovermental Panel on Climate Change), the international community formed the UNFCCC to survey policy options to check GHG emissions, particularly from burning fossil fuels. Most nations have taken limited actions, e.g. regulation of emission sources, improving the standards of vehicle fuel efficiency, and investing more in non-combustion fuel. Other nations have also adopted carbon tax as a regulatory tool for the CO2 emission. Carbon tax is levied on fossil fuel to prevent the market fiascos related to its use. Without carbon tax, the end-users do not endure the total cost of using the product, which includes economic losses from pollution and climate change. Carbon tax targets for correcting this failure by factoring the social costs of the extreme negative effects in the final price of the fuel. The resultant effect of this is the increase in the retail fuel price due to the adopted social costs, which will subsequently reduce the amount of fossil fuels ordered by the end-users (McKitrick 79-82).
By increasing the final price of fossil fuels, the tax will raise the overall cost of goods and service production, chiefly transportation and electricity, that encompass significantly huge volumes of CO2 emissions. This will encourage companies to produce their goods in processes that involve low GHG emission. The higher cost will also lead to the increase in the prices of services and goods produced through emission-intensive processes, thus will force the end-users to reduce the use of the latter and opt for other alternatives. Without taking account of how the income from the taxes would be spent, such a tax would impact the economy negatively. Higher prices related to the tax will lower people’s purchasing power, thus reducing their actual earnings and the general labor supply. It will also lower limit investments, further decreasing the actual output of the economy.
Carbon taxes have been adopted in several nations, which resulted in different economic and environmental outcomes. Other countries are considering implementing the tax. In the international community, carbon tax has been in existence for about two decades. In the early 90s, carbon taxes arose in the northern countries of Europe. Finland was the pioneer nation to adopt it, which was followed by Netherlands, Norway, and Denmark consecutively within the next two years. The UK implemented the tax nearly ten years after its adoption by Finland. By the year 2014, over forty nations and more than twenty sub-national jurisdictions had adopted or were planning to implement the carbon tax (Regional Economic Models, Inc. [REMI] and Synapse Energy Economics, Inc. [Synapse] 7). These cases amounts to twenty-two percent of total GHG emissions worldwide. Many more nations are improving their mechanisms for adoption of the tax, which will all cater for about fifty percent reduction of the emissions. Out of the ten largest economies globally, only two nations do not have a national carbon tax policy (Lapsevic 13).
The tax can be brought in as an independent tool or hand in hand with other pricing instruments, e.g. the energy tax. While the policy is new, its implementation is spreading at a fast rate. The table bellow demonstrates the existing implemented policy.
|Applies directly to 370 Businesses
|Applies to buying/ use of fuel within the province.
|Enacted on carbon pollution.
|3.5% of fossil fuel.
|Levied on all consumptions of fossil fuel.
|USD31 per tCO2e
|As carbon/energy tax
|EUR35 per tCO2e
|Levied on content of CO2 of fuel.
|EUR7 per tCO2e
|Applied on all imports of liquid fossil fuel.
|USD10 per tCO2e
|Is limited to those sectors outside of the EU ETS,
|EUR 20 per tCO2e
|Use of fossil fuel
|USD2 per tCO2e
|Sales of fossil fuel
|Mex$ 10 -50 per tCO2
|Covers over 55% of emissions
|USD 4-69 per tCO2e
|Based on carbon content
|USD 4-69 per tCO2
|On liquid fuel
|USD168 per tCO2e
|Levied on fossil fuel
|USD15.75 per tCO2e
The concept provides enticements to decrease the consumption of energy and to step up its efficiency, hence lowering the GHGs emission. It is an all-round economic related policy that can curb the emissions at all cradles unlike other regulatory policies that are aimed at the emissions from a single unit such as transport sector, heating or electricity. The nations that have adopted carbon tax did so with ease because of its simplicity in administration. The infrastructure for collecting it is like that of the prevailing taxes, unlike for the other regulatory forms whereby it requires new mechanisms for implementation. The efficiency and life span of a policy is determined by its administrative complexity, which in this case is in favor of carbon tax.
Carbon tax provides a distinct price indicator to industries and consumers, which in turn allows them to make better decisions when it comes to making purchases and investing, unlike the other policies whereby the effect on the product price is unclear. Lack of a price trend prevents firms and individuals from making proper economic decisions. While carbon tax is fixed for a given amount of fuel, the end-users tend to adopt energy-saving practices and invest more in energy-saving technologies with certainty in price knowledge. As a result, carbon taxes can exploit its effect on the consumer behavior by giving a distinct price indicator. The take-home benefits of carbon tax are the eradication of the negative extremities associated with fossil fuels and the use of the collected tax to counterpoise other tax revenues (McKitrick 8).
Challenges Related to Carbon Tax
Carbon tax has potential setbacks, which include untoward effects on the poor as well as the absence of fail-safe environmental benefit. First, it is hard to distribute the cost of the tax evenly among the households. For instance, an extra cost resulting from increased prices of goods and services will cover a bigger percentage of income for a low earner unit in comparison to that of a high earner unit. This is mainly because the low earners spend a bigger share of their income on emission-intensive goods. There is lack of equity, especially on income. Families with low income are obliged to divert a larger percentage of their earnings to other energy related bills like utility bills and fuel bills for the vehicles; hence the introduction of carbon tax will add another inappropriate financial constraint to lower earners.
Secondly, investors and employees of the sectors that are emission- intensive will experience the largest drop in demand for their goods, and will be probable to feel a heavy economic burden. Also, the regions that use fossil fuel for electricity generation will see an increase in the prices of electricity compared to other regions. This can be addressed by applying the tax at a fixed rate over a wide economic territory. There is also the challenge of uncertainties as regards to the outcomes of the policy. Unlike other policies, it regulates prices, but not the amounts of real emission. As such, it is hard to enumerate the effect of the tax on emissions of the GHG.
Another challenge for carbon tax is the public perception. There is a strong resistance from the public domain to the introduction of new taxes, including pollution taxes, e.g. cigarette smoking tax. The main reason for this reaction is the public’s view on the taxes as a scheme designed by the government to increase revenue collection regardless of the primary intention. As seen, in the U.S, the voters reject initiatives to introduce new taxes. As a result, political viability hinders the policy makers from following this option. Lastly, there is a possibility that the tax could cause a swing in the emissions when adopted inadequately in different regions and countries. This will affect the average prices of fuel and may cause adverse effects on the general production activities, especially those that are high energy rated (Congressional Budget Office [CBO] 5).
The decisions on making use of the revenue collected from the tax will be of much help in addressing the challenges associated with carbon tax. Some specific uses of these collections could significantly equipoise the entire economic costs arising from the tax while other uses would not, thus making the tax look like any other mechanism for revenue collection by the government. The negative effects of carbon tax would be balanced if the revenue collection could be used to reduce the deficit. The budget deficit can result in a low economic output, eventually. Although it cannot ease the ultimate costs of carbon tax, a consideration can be given to avert the revenue collected from the groups of the population who would probably feel an unproportional constraint from carbon tax. This policy will reprieve the low earners, even though it is not recommended as a national tool to curb the negative bearings of carbon tax (CBO 4-5).
Recommendations and Conclusion
Carbon tax is a type of tax applied to the amount of composition of carbon in fuels. It is normally apllied to the amount of GHG (especially CO2) released to the environment from burning of fuel and can be very effective if instituted accordingly. Releases of GHGs into the atmosphere is expected to have serious effects on the global climate. Although there are several challenges associated with carbon tax, it has been adopted successfully in several nations. Other countries are planning to implement the tax. Although the policy is the most efficient way of reducing the GHGs emission, it also has potential setbacks, which include untoward effects on the poor class as well as the absence of fail-safe environmental benefit. Nevertheless, these can be overcome by designing the policy carefully.