Carbon Tax Explained

October 12, 2010 by jason

Having just written an article on Cap and Trade, I'd like to reflect on another potential economic solution to growing greenhouse gas emissions; the Carbon Tax.

A Carbon Tax is basically a simple tax levied on fossil fuels as a percentage of total cost (as is the case with most taxes). The reason it is called a carbon tax is that the combustion of fossil fuels causes the infamous carbon compound called CO2 (aka Carbon Dioxide) to be released into the air. By taxing the sale of fossil fuels that increase carbon emissions, one would expect a reduction in the use of these types of fuels, thus artificially inflating the demand for energy sources that do not cause/cause less CO2 to be emitted. These are most prominently Solar Energy, Wind Power, Biofuels and Nuclear Power.

As a Carbon Tax is an indirect tax, which is a tax charged on a transaction rather than on income, it would ideally penalize producers, not consumers. However, this is not always the case, as producer often compensate for the tax by increasing the price they charge for their product - thus penalizing consumers.

Many countries have implemented some form of Carbon Tax (especially in Europe), and many more are considering it as an option. The most notable alternative to Carbon Tax is Cap and Trade, which I personally believe to be a better option.