A carbon tax is a fee that is imposed on households and organizations for the amount of carbon-based and fuels that they consume over a specific time period. These fuels can include oil, gas, or coal. The intent of implementing the system is to have those who use these carbon fuels pay for the damage in the environment caused by their combustion. As the Carbon Tax Center states, it is “the only way” to reduce and eventually eliminate the use of fossil fuels.
Carbon chemistry is simple despite its potency. When someone burns a fossil fuel, then the amount of carbon dioxide released to the atmosphere is strictly proportional to the amount of carbon content contained in the fuel. This structure makes it possible for a carbon tax to be levied upstream on the actual fuel when it is extracted or imported to a jurisdiction that imposed this tax.
The state of Washington has attempted to implement a carbon tax more than once without success. There are currently no jurisdictions in the United States which have instituted this policy as of the time of this writing (March 2019). Only a few countries have an active policy to examine the pros and cons of a carbon tax, with only one – located in British Columbia, Canada – considered to be comprehensive enough to generate useful metrics.
These are the key points to consider.
List of the Pros of a Carbon Tax
1. The design of a carbon tax allows it to provide multiple benefits.
When a carbon tax is implemented, there are two potential benefits to consider with this legislation. There is the possibility to experience a financial return for households who limit their fossil fuel consumption in the form of credits, rebates, or refunds of their other expenses. This policy also provides the possibility to develop more access to efficient, cheaper renewable energy options.
When correctly designed, a carbon tax places the fee on the consumers who are using these fuels most often. The reason why it has failed in the past, especially in the U.S., is that the end consumer pays the corporate and personal carbon taxes together at the pump or upon delivery instead of having all parties held jointly responsible.
2. A carbon tax would reduce the amount of CO2 being released to the atmosphere.
The presence of a carbon tax would help to reduce the amount of this greenhouse gas in the atmosphere. About 45% of man-made CO2 stays in the atmosphere because there are not enough land plants and ocean water to absorb the excessive amounts. This extra gas creates a greenhouse effect which impacts the overall temperature of the planet. Water vapor may account for 50% of this effect, but carbon dioxide contributes approximately 20% of it. Passing this legislation would allow us to begin reducing the amount that is present in the environment.
3. The passing of a carbon tax would encourage new renewable technologies.
The ultimate goal of a carbon tax is to encourage everyone to seek out renewable alternatives that do not require the production of CO2 as we consume need it fuels. There are multiple ways for people and corporations to avoid paying this additional fee. Instead of driving to work, some employees could choose to walk, ride a bicycle, or take public transportation. Businesses could look for eco-friendly alternatives that reduce their financial obligations to the local government. Although the lifestyle changes could be seen as a disadvantage by some, the long-term environmental improvements that occur will help future generations to have a place that they can also call home.
4. It could become a source of revenue for some businesses.
The standard structure of a carbon tax includes specific credits that businesses use to “offset” the CO2 that they released in the atmosphere. If a company does not use all of their assigned credits, then it may be possible to sell them to another business which is producing more greenhouse gas emissions. This structure creates a net effect where pollution is reduced while some companies can profit from their ability to be eco-friendly.
5. The jurisdiction that passes a carbon tax finds financial benefits as well.
The Congressional Budget Office (CBO) in the United States looked at the possible financial impact that a nationwide carbon tax would create if it were passed. They discovered that this policy could generate an additional $1.2 trillion in revenues over a 10-year period from the calculations they made in 2001. These funds would then be funneled into new renewable energy technologies, solar and wind production, and even social support programs that could help people re-train for the clean energy jobs that may be available in the future.
6. It does not create an undue burden on families.
When Washington State attempted to pass a carbon tax in 2018, the expected final expense increase for fuel consumption was estimated to be roughly $400 per person. Heavy marketing by opponents of the measure helped to spread knowledge of this figure, which is likely one of the reasons why it was defeated at the ballot box.
British Columbia implemented their carbon tax in a different way. Although there is an extra fuel fee, there is also a tax credit of $40 per child and $135 per adult in each household. This structure offsets the costs for many families while holding those who are responsible for CO2 emissions to pay their fair share.
7. The presence of a carbon tax can help local economies to begin growing.
The evidence of economic growth occurring because of a carbon tax also comes from British Columbia. Their policies have been in effect for over 10 years. While the net levels of CO2 went down by roughly 5%, the real GDP growth of the provincial economy climbed by over 15%. Although not every set of greenhouse gas emissions are covered by this policy, about 70% of them are. This data suggests that it is possible to reduce the amount of carbon being released in the environment without creating an adverse economic impact in return.
8. It is possible to avoid the costs of a carbon tax.
The goal of a carbon tax is to have the people who use this fuel pay for the potential environmental consequences that they cause. If you want to avoid this fee, then you can switch to an alternative source which does not use fossil fuels. This change may not be simple for some households (and it could be impossible for those in rural communities with our current infrastructure), but simple changes can reduce the financial obligations of this legislation while limiting the number of lifestyle changes that may be necessary.
List of the Cons of a Carbon Tax
1. The administration of a carbon tax has relatively high fees.
The potential of a carbon tax might be worth over $100 billion per year in the United States, but it is also a system which requires a high initial upfront cost to administer the policy. There must be trained administrators in place who can measure the amount of carbon that households and companies consume to offer an accurate taxation policy. Over the first few years of this policy, the incoming revenues may be entirely offset by the setup costs to administer the new system. British Columbia proved that it can be a successful policy, but they are also over 10 years into their approach.
2. It can make it challenging for businesses to stay competitive.
One of the casualties from the carbon tax policies in British Columbia, Canada, was the mining company Teck. They are paying over $50 million each year to satisfy the expectations of this policy, which means they are raising prices as a way to offset these losses. Since 2008, the number of cement imports occurring between the United States and China rose to 40% of the market because Teck couldn’t stay competitive due to the costs that only they faced because of the carbon tax initiative.
3. The credits offered through a carbon tax can cause an increase in consumption.
One of the ways the United States is looking at reducing or eliminating this disadvantage of a carbon tax is through a redistribution of the credit. Instead of sending the money to households, they would offer it to the agencies who are developing clean energy resources. That would prevent others from purchasing fossil fuels with the extra money they receive in return from the government. British Columbia tries to make the cost a neutral expense while going after producers and importers.
If specific regions adopt a carbon tax and offer credits that others do not receive, then it may encourage a shift in population that could increase consumption of fossil fuels as well. For this policy to be effective, it must occur at a state/provincial level at minimum – and preferable a national level.
4. It does nothing about the current fossil fuel resources already produced.
Future generations in the United States have exceptional access to coal, natural gas, and crude oil thanks to the reserves which are present underground and with what has already been produced. We currently have more than 50+ years of each resource available, with some estimates suggesting that the U.S. has 200 to 400 years’ worth of coal already processed. Implementing a carbon tax would make these energy items virtually worthless because only new production would experience the tax. If the resources remain stagnant over an extended period, then they may become unusable, which means we might never make up for their overall production cost.
5. The policies of a carbon tax might result in failure.
The carbon reduction goals in British Columbia are nowhere near what policymakers thought they would be when this policy was first passed in 2008. Although an almost 5% reduction in CO2 from the province is notable, it also shows that the actual annual influence of this legislation is about 0.5% each year in gas reduction. Although many people, especially progressives, agree that climate change is an issue that must be addressed, using a carbon tax to do so is not always the preferred option.
6. It requires patience for the general population to see the benefits of a carbon tax.
British Columbia is unique in the fact that they passed their carbon tax without majority approval in the province. Even in 2018, it still did not have this support, with only 32% of residents saying that they liked or approved of the policies in this initiative. When Washington State rejected their second attempt at a carbon tax in 2018, about 43% of the population approved of the measure.
More people actually disfavor the presence of a carbon tax after implementation than they do in the first days of this policy.
7. The carbon tax initiative can create artificial markets.
Many of the carbon tax initiatives that are proposed around the world involve an emissions trading system. That means one company can trade or sell their “permitted CO2 emissions” to another business that has already exceeded their allowed quota. This structure reduces the tax liability of the excessive polluter, allows smaller companies to profit from the artificial economy, and often creates an added cost at the consumer level. Although consumers will often receive a financial credit as a way to offset their costs, it usually costs more for the average person than it does the average business on a per capita basis to fund this policy.
8. It targets the consumer instead of holding producers responsible.
When you read the policies of a carbon tax, you will discover that the language suggests that the largest users and importers of fossil fuels are the ones who will pay the fees. What you don’t see is a limit on how much companies can raise prices because of the presence of this legislation. The local government can charge more for carbon production at a corporate level, but then that company will increase prices to cover the expense. That means low-income households pay the most significant share of the financial costs of this policy while the companies targeted do not pay anything.
The only ways to avoid this disadvantage is to prevent price increases in the market or subsidize the expected additional expenses of the consumer.
9. The fuels that all of us use are based on carbon-releasing items.
If you are generating solar power from your roof at home, then you still would face a carbon expense from the fossil fuels used to manufacture the panels in the first place. You could switch to a high ethanol blend of gasoline and still see an increase in your commuting expenses. The electricity that we all use is often sourced from coal-fired plants. The reality of our current economy is that we are all significant consumers of carbon-releasing products because we’re using computers, televisions, and appliances in our kitchen.
10. It would require global compliance to be effective.
The reality of our planet is that trade occurs when it is financially beneficial to both parties. When one country, state, or province decides to implement a carbon tax, the import/export market shifts to a cheaper location. Roughly 60 different jurisdictions have this policy in place in some way, which represents less than 20% of the overall greenhouse gas production on the planet. If the cost of goods rises because of this policy, then other nations will look elsewhere to have their needs met.
11. The ability to tax carbon fuels upstream is not always practicable.
The goal of a carbon tax is to target the fuels as far upstream as possible. That means where possession of the fuel passes from the producer to the next entity in the supply chain. The example the proponents use is when a mine, wellhead, or tanker passes the item to the utility, shipper, importer, or pipeline. Because there is variability in the quality of each fuel, the taxation must be based on BTU to be effective. If there are not contracted quantities of production involved, the furthest upstream a carbon tax could go may be the amount purchased by the final consumer.
These carbon tax pros and cons take a look at what really happens when this policy is implemented instead of looking at only the simulations or modeling. Unless the real polluters are held responsible for their actions with this type of policy, consumers are always going to be against it because they are going to feel like they are paying more than their fair share. Some households in Canada are paying an extra $1,000 per year to remain in compliance while fuel producers pass along the extra charges to become revenue neutral. If there were fewer loopholes, better structures, and more accountability where it matters, this option could help the environment to become healthier.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.