(59) Climate Change

What’s a carbon tax?

carbon tax

Carbon Tax

A carbon tax is a levy on sources that emit carbon dioxide (CO2) into the atmosphere. The purpose is to place a financial disincentive on carbon-emitting activities and encourage investment in cleaner technologies and practices. Although no internationally levied carbon tax is in operation, several nations apply variants of this pollution tax.

Historical Background and Scientific Foundations

On January 1, 1991, Sweden became the first country to implement a carbon tax, when it introduced a levy of 0.25 SEK/kg (approximately 0.11c/kg) on the use of carbon-based fuels used in domestic travel. A rate of 0.125 SEK/kg was placed on the use of such fuels

by Swedish industry. Other countries-such as Finland, Norway, the Netherlands, and the United Kingdom-have since implemented their own variants of a carbon tax.

The economic principles underlying a carbon tax are simple. By placing an economic disincentive on carbonemitting activity, primarily the burning of fossil fuels, it simultaneously discourages the discharge of CO2 into Earth’s atmosphere, while encouraging technological innovation to both reduce CO2 and provide an alternative energy to carbon-based fuels.

Impacts and Issues

A lack of international consensus on the efficacy of carbon taxes remains the main reason they are not more ubiquitous. Some argue that unless applied more universally, individual governments likely remain reluctant to place the additional economic burden of carbon taxation on domestic industries and businesses, claiming that foreign competitors not subject to a carbon tax in their home nations would gain an economic advantage.

Others assert that the selective carbon taxes should target only the heaviest polluters-often industries with relatively high margins of profit, such as fossil fuel companies.

Supporters of carbon taxes maintain that they are essential to reduce emissions in order to prevent atmospheric concentrations of CO2 from reaching an irreversible ‘‘tipping point.’’ They assert that internationally applied carbon taxes would help transform the planet’s fossil fuels-based energy system to reliance on energy efficiency, renewable energy, and sustainable fuels. It also encourages ‘‘green’’ innovation in other areas. A significant share of opposition to carbon taxes stems from business and industrial interests. Critics note the additional cost burden placed on businesses, also the lack of viability without an international framework. Unless all countries adopt a carbon tax, it places polluting nations in an economically advantageous position; doubly penalizing business rivals elsewhere that are compelled to pay a carbon tax.

The Swedish experience shows some of the difficulties of maintaining a carbon tax when other countries refrain from introducing such a levy. From the outset, Swedish businesses, already subject to relatively high taxation, complained that a carbon tax lessens their competitiveness in the marketplace. As a concession, the tax was halved for Swedish businesses, and halved again during the financial recession of the mid-1990s. A further concession fully exempted certain high energy using industries such as commercial horticulture, mining, manufacturing, and the paper industry.

The environmental benefits of Sweden’s carbon tax are mixed. Annual CO2 emissions have fallen only slightly since 1990. Because energy costs represent a relatively small percentage of a businesses’ total costs, companies were slow to modify or upgrade existing plants as a result of the new taxes. On the other hand, carbon taxes have prompted technical innovation, for example in the home-heating industry. Sweden is now a world leader in the manufacture of biomass and geothermal energy products. This has not just helped reduce domestic carbon emissions, but has created a new export industry and economic boon.



Mankiw, N. Gregory. ‘‘One Answer to Global Warming: A New Tax.’’ The New York Times (September 16, 2007).

Web Sites

‘‘Carbon Taxes: An Introduction.’’ Carbon Tax Center. <http://www.carbontax.org/introduction/#what> (accessed December 28, 2017).

‘‘Emission Possible.’’

The Age, June 17, 2007. <http://www.theage.com.au/news/in-depth/emissionpossible/2007/06/17/1182018934799.html?page=fullpage#contentSwap2>

; (accessed December 28, 2017).

Frank, Robert H. ‘‘A Way to Cut Fuel Consumption That Everyone Likes, Except the Politicians.’’ The New York Times, February 16, 2006. <http://query.nytimes.com/gst/fullpage.html?res=9D05E7DA133EF935A25751C0A9609C8 B63> (accessed December 28, 2017).

Words to Know

Biomass: The sum total of living and once-living matter contained within a given geographic area. Plant and animal materials that are used as fuel sources.

Carbon-Based Fuel: Any substance composed mostly of carbon that is burned or otherwise chemically reacted to release energy. Most biofuels and all fossil fuels are carbon based, although natural gas also contains a significant fraction of its energy in the form of hydrogen.

Fossil Fuels: Fuels formed by biological processes and transformed into solid or fluid minerals over geological time. Fossil fuels include coal, petroleum, and natural gas. Fossil fuels are non-renewable on the timescale of human civilization, because their natural replenishment would take many millions of years.

Renewable Energy: Energy obtained from sources that are renewed at once, or fairly rapidly, by natural or managed processes that can be expected to continue indefinitely. Wind, sun, wood, crops, and waves can all be sources of renewable energy.

Tipping Point: In climatology, a state in a changing system where change ceases to be gradual and reversible and becomes rapid and irreversible. Also termed a climate

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