Carbon Tax

Carbon Tax is a tariff or sanction imposed on companies and industries that produce carbon dioxide during the course of production or manufacturing. Many businesses produce carbon dioxide (CO₂) as a byproduct while producing or manufacturing the products they sell. The tax is designed to promote the adoption of manufacturing processes that help reduce CO₂ and greenhouse gas emissions.

The carbon tax is imposed for every ton of CO₂ and other greenhouse gasses a company emits during its production process. Various tax computation methods are applied on regional, national, and sub-national levels. Most governments around the world collect taxes and offer incentives to businesses in an attempt to keep air pollution and greenhouse gasses in check. Such endeavors are planned to eliminate the adverse effects of CO₂ and control issues due to climate change.

• Industries pay carbon tax for the CO₂ and other greenhouse gasses they produce and release into the atmosphere.
• It encourages companies to modify their operations to reduce or eliminate carbon emissions.
• Carbon tax, cap-and-trade systems, and Emissions Trading Systems (ETS) are various methods employed by countries around the world to reduce carbon emissions.
• Though the carbon tax system offers several benefits, certain disadvantages have also been observed. For example, tax evasion is a possibility, or the prices of products and services can increase if the tax burden is transferred to customers.

A carbon tax is a direct tax imposed on multinational corporations and companies with large-scale operations for the amount of carbon they produce and release into the atmosphere. While creating products, many businesses produce an enormous amount of carbon dioxide and other greenhouse gasses as a byproduct, which they release into the environment. The tax is a tariff the government levies on such companies to compensate for environmental damage.

While some governments impose a direct tax on companies, others have introduced an Emissions Trading System (ETS) or cap-and-trade systems to cap the amount of carbon and other gasses released annually. They award carbon tax credits as incentives. Climate change is a serious global concern, and to control environmental damage, governments worldwide have established many projects and treaties to encourage the reduction of carbon and other fossil fuel emissions. Controlling emission output is a worthy goal, given the current climate change situation.

The carbon tax European Union, a cap-and-trade system, also called EU ETS, is one of the best examples of such measures. The price of emission allowances in the EU carbon program was at its highest in February 2023, with the numbers reading 100.34 Euros per metric ton of CO₂. The US does not have such a tax program. However, the government has pledged to achieve carbon neutrality by 2050.

Currently, 27 nations have introduced this tax. Additionally, there are 64 carbon pricing initiatives worldwide at different levels. New Zealand is the first country to impose a carbon tax, as citizens pay an extra NZ$2.90 for gas, electricity, and petrol every week.

Here are two examples of the carbon tax to understand the concept:

Example #1

Suppose a town with many factories and industries produces a large quantum of carbon emissions annually. Earlier, no carbon tax was imposed, but recently, the local government announced they would charge $9 per metric ton of carbon dioxide emission every week. The business community in the town welcomed this rule, and they were ready to contribute and work toward controlling global climate change.

Now, if the town emits 90 metric tons of CO₂ every week, it pays $810 to the government. This benefits the government as it becomes a source of revenue and encourages businesses to reduce their carbon dioxide emissions to ensure they are not required to pay hefty amounts as taxes.

The town pays the government $42,120 (810 x 52 weeks) annually based on the emission level. The money collected by the local government is reinvested in climate change programs and other innovations that can better the environment.

Example #2

According to a September 2023 news report, African leaders have asked for the introduction of a global carbon tax system at the African Climate Summit in Nairobi, Kenya. The proposed system is based on the ideology that major polluters worldwide should pay more taxes to help poor nations introduce green energy systems, making them more resourceful and action-oriented while handling the effects of climate change. The leaders have also proposed eliminating fossil fuel subsidies and phasing out coal.

Currently, Africa generates approximately 4% of global greenhouse gas emissions, but it is one of the worst-hit nations due to climate change. Ghana's Finance Minister Ken Ofori-Atta says that a global financial system that eliminates or nullifies the effects of climate change worldwide is necessary. He also sought to initiate key measures for risk management and credit enhancement to make climate change projects economical.

Carbon tax rebates enable citizens to receive a portion (as incentives) of these taxes collected. It is common in Canada; the Canadian carbon tax allows citizens to receive tax rebates under certain circumstances and based on their geographical location. The tax rebate is officially called the Climate Action Incentive (CAI) Payments and takes the household size into account.

In 2018, Canadian Prime Minister Justin Trudeau passed the Greenhouse Gas Pollution Pricing Act to control pollution through charges, prices, and fees. The bill authorized the government to introduce a carbon pricing system in those provinces that do not have a model of their own. The tax charged in 2019 was $20 per ton. Gradually, the carbon tax increases resulted in an increase of $10 per ton yearly till it reached $50 in 2022. Its objective was to ensure that Canada met its Paris Agreement obligations.

The tax rebate system varies from one province to another—from British Columbia to Ontario and Quebec to Nova Scotia. Every territory has a different set of rules and regulations and a different tax rebate. Under the carbon tax in Canada, the residents of Manitoba, Alberta, Ontario, and Saskatchewan are currently under the purview of the federal rebate. Based on the province and household size, the rebate payments increase over time. Citizens claim these payments through income tax returns. The Canada Revenue Agency (CRA) determines and processes the rebates a citizen is entitled to receive.

If an individual belongs to a small community or comes from a rural area, they receive an additional 10% of the base amount as a rural supplement. Also, the federal tax revenue is allocated to indigenous communities, municipalities, schools, universities, and small and medium enterprises.

The advantages of a carbon tax are:

• It is a fee charged by the government to businesses that produce excess emissions of carbon, fuels, and other greenhouse gasses, making sustainability a priority and boosting environmental awareness.
• Governments initiate carbon tax programs to incentivize and encourage businesses to adopt methods and tools that facilitate the reduction of carbon emissions, benefitting the climate change control cause. This helps preserve the environment.
• It promotes air pollution control, which indirectly reduces many other forms of pollution and harmful diseases.
• The funds collected as carbon taxes are reinvested in domestic and international climate change projects and programs.
• Due to this tax, businesses operate with a sense of responsibility toward the environment and avoid hazardous or unethical practices. This improves the overall business environment in a country.

The disadvantages of a carbon tax are:

• If the taxes are high, businesses can adopt tax evasion methods, which beats the primary purpose of introducing such charges.
• Companies might hide their actual pollution and emission levels to pay lower taxes.
• The carbon tax levied can result in an increase in the cost of products and services, as companies may transfer the financial burden of such tax outflows to customers.
• If the carbon tax is high in one country, companies can go for outsourcing their operations to other countries where taxes are low or negligible.
• A global agreement between nations regarding carbon taxes seems to be the need of the hour. However, no suitable agreements are in sight yet.

The key differences between carbon tax, missions Trading System (ETS), and cap & trade are:

This article has been a guide to what is Carbon Tax. We explain it with its rebate, comparison with cap & trade and ETS, advantages, disadvantages, and examples. You may also find some useful articles here -

• Carbon Offset
• Carbon Credit
• Pigouvian Tax