WHAT’S A CARBON TAX, AND HOW DOES IT REDUCE EMISSIONS?
A carbon dioxide tax is a tax on businesses and industries that produce carbon dioxide through their operations. The tax is designed to reduce the output of greenhouse gases and carbon dioxide, a colorless and odorless incombustible gas, into the atmosphere. The tax is imposed with the goal of environmental protection.
Carbon is found in every kind of hydrocarbon fuel (including coal, petroleum and natural gas) and is released as the harmful toxin carbon dioxide (CO2) when this kind of fuel is burned. CO2 is the compound primarily responsible for the “greenhouse” effect of trapping heat within the Earth’s atmosphere, and is therefore one of the primary causes of global warming.
Carbon taxes have been implemented in a number of countries around the world. They take several different forms, but most amount to a straightforward rate of taxation per ton of hydrocarbon fuel used. India has put Rs 200 per ton on coal as Carbon tax.
A carbon tax aims to internalise the externality of climate change by setting a price on the carbon content of energy consumed or greenhouse gas emitted in the production or consumption of goods.
Carbon tax regimes will only be effective if harmonised internationally. Different country-wise policies could lead to ‘carbon leakages’ where energy-intensive businesses will most likely move to less strict national regimes.
Advantages of Carbon Tax over other regulation and control
First, a carbon tax regime avoids the problems related to choosing a baseline. In a price approach, the natural baseline is a zero carbon tax.
Second, a carbon tax policy will be better able to adapt to the element of uncertainty which pervades the science of climate change. Quantity limits on emissions are related to the stocks of greenhouse gas emissions, while the price limits are related to the flow of emissions.
From this uncertainty arises another complication of price volatility which is the third reason why a carbon tax policy is likely to cause less volatility in the prices of carbon emissions.
Fourth, quantity limiting policies are often accompanied by administrative arbitrariness and corruption through rent-seeking. This sends off negative signals to investors. In a price-based carbon tax, the investor has an assured long-term regulation to adapt to and can weigh in the costs involved.
Fifth, the most contentious issue in any international negotiation on climate change mitigation either at the level of the World Trade Organisation (WTO) or at the United Nations Framework Convention on Climate Change has been the issue of equity between high-income and low-income countries. The price-based approach in the form of carbon taxes makes it easier to implement such equity-based international adjustments than the quantity-based approach.