What is a Carbon Tax?

First of all, lets clarify what exactly a “carbon tax” is. Starting with the first word in that politically weighted phrase, carbon is a substance that can be found in all hydrocarbon-based fuels like coal, petroleum, and natural gas. When these fuels are burned for energy, the carbon is released in the form of carbon dioxide, a greenhouse gas that scientists overwhelmingly believe is responsible for a rapid change in the earth’s climate. Taxes as we all know, are compulsory charges imposed on individuals, groups, and corporations by a governmental body that when left unpaid, can result in civil or criminal penalties. Put these two together, and you get one of today’s most debated economic policies and a potentially powerful climate change mitigation tool. It is no secret that climate change is a very real and impending issue facing modern society and for this reason, lawmakers in this country are considering the institution of a carbon tax.

According to a recently published study by the policy think tank, Resources for the Future, a carbon tax has the potential to generate $1.6-$3.6 trillion in revenues over the course of ten years that when spent on revenue-neutral capital tax reductions, would result in little to no net social costs. In British Columbia, a carbon tax was instituted in 2008 that resulted in a decline in gasoline use that was 7 times as low as what the expected decline would be in the case of a rise in market value for the fuel without the tax. An article in Mother Jones Magazine stated that the government in the Canadian province generate $5 billion in 5 years of which $3 billion was spent on business tax cuts, $1 billion in personal tax breaks, and $1billion in low income tax credits.

Another idea for what to do with the revenue generated from a carbon tax would be to re-invest it in a new low-carbon infrastructure. The author of a recent Forbes article on the subject of carbon taxes, James Conca, argues that in order to repeat the country’s rise to economic greatness experienced in the late 20’s-late 70’s, a significant investment in infrastructure must be made. This means roads, bridges, railroads, ports, and of course the energy infrastructure. Additionally, he believes that a portion of the revenue generated should be spent on helping relief groups become more disaster prepared as the effects of climate change are being more often felt these days.

The Carbon Tax Alternative

An alternative approach to lowering carbon emissions has been through the implementation of what is called a cap and trade system. It essentially works by establishing a ceiling or maximum level for permissible carbon pollution and issuing permits to companies for each “unit” of pollution. Those companies that figure out ways to pollute less are then allowed to sell or “trade” permits with those that would pollute more. The idea is that because a ceiling is established, the net carbon impact can always be controlled. Unfortunately, a cap and trade system tends to not have quite the environmental or economic effect that a tax does. When a cap and trade system is implemented, it is common for all existing carbon emissions to be “grandfathered” in with only new emissions subject to the established ceiling. While this is definitely popular for industry, it does little to address the immediate need for carbon reduction. From an economic perspective, cap and trade does not create direct revenue for local and state governments either, thus eliminating the possibility for investment in more fuel-efficient technologies and alternative energy infrastructure.

Even if one is not particularly concerned with the effects of climate change, think of a carbon tax more in terms of its resource generation and technological advancement capabilities. Our country and the world is on the cusp of experiencing a dramatic change in the way that modern life is defined and policies like a carbon tax will help our society create the tools that we need to adapt and thrive.