Any discussion of climate change these days generally involves questions about how to incentivize transitioning away from fossil fuels to more renewable forms of energy production. One option that’s long been on the table is the introduction of a carbon tax to make burning fossil fuels more expensive.

Of course, instituting a new tax is never popular, but a more complete understanding of how a carbon tax would work can help make clear the real arguments for and against it. This type of tax is also part of a trend towards taxing unhealthy or luxury items, such as the soda taxes that a growing number of cities and states are in the process of enacting.

Opponents argue that they’re an attempt to manipulate people into changing their behavior, and while that may be true, the fact remains that they can be quite effective in that regard and provide substantial health benefits to society as a whole.

What Is a Carbon Tax?

A carbon tax is essentially a fee assessed on the release of carbon dioxide into the atmosphere as a result of burning fossil fuels for energy. This includes burning coal or natural gas to produce electricity, as well as the burning of gasoline and other petroleum products to power motor vehicles.

Carbon within plastics or other materials that is bound and so will never be released as CO2 would not be taxed, nor would CO2 that is captured and permanently stored.

How Does it Work?

In order to be effective, a carbon tax would have to be set high enough to provide significant financial incentives to push consumers away from fossil fuel consumption. It also must be raised annually to continue the movement away from fossil fuels. However, it does not preclude the introduction of other types of technologies that can eliminate CO2 from coal-burning plants, and presumably, that type of activity would be rewarded with a tax credit.

One difficulty with establishing a carbon tax is where precisely in the supply chain to levy it. For simplicity’s sake, instituting it as far upstream as possible, on the refiners of petroleum or the generators of electricity, creates the most straightforward and most easily monitored system. In this setup, the refiner or generator would pay the tax to the supplier, who would then remit the payment to the government. The extra expense would then be passed on down the line, eventually finding its way to the end consumer.

Of course, these end consumers have no direct control over how their utilities generate electricity, for instance. This arrangement, however, could allow those providers who choose to utilize renewable energy sources to offer lower prices, which in turn would draw customers away from the companies that continue to charge high rates because they were still primarily using fossil fuels.

Carbon Tax vs Cap-and-Trade

Another solution that’s often discussed as an alternative to a carbon tax is a cap-and-trade system, which would set limits for CO2 emissions for companies. They would be penalized for exceeding those limits, and conversely, they could sell whatever allowances they didn’t use to other companies.

Proponents of a carbon tax argue that the cap-and-trade system is significantly more complicated than a straight carbon tax, and because of that complexity, there are many opportunities for companies to find loopholes, thereby limiting the effectiveness of the policy. A carbon tax, they go on to say, would also provide a reliable and substantial revenue stream that the government could then use to mitigate the impact of the tax on lower-income households and to reinvest in the development of new renewable energy production technology.

Benefits Beyond Climate Change

Along with the benefits of reducing carbon emissions into the atmosphere, a carbon tax would also lead to a reduction in levels of conventional air pollution. A reduction in the use of fossil fuels generally would lessen the destructive impacts mining and drilling for those resources can cause, including the contamination of land and waterways. In many parts of the world, the extraction of fossil fuels and the huge financial benefits that come with it have led to war and corruption that destroys societies as well.

Carbon Taxes in Other Countries

A carbon tax is hardly a new idea. In fact, many other countries have a similar proposal in the planning stages, and some have implemented them already. Perhaps the most comprehensive of these is the carbon tax that’s already in place in the Canadian province of British Columbia, and Canada is working on a plan to implement a carbon tax nationwide as well.

Other countries with carbon taxes in place or in the works are the United Kingdom, Sweden, Finland, Ireland, Australia, New Zealand and Chile, and the trend will only grow moving forward. That makes one of the most commonly-heard arguments against a carbon tax, that it hurts American companies’ ability to compete internationally, less and less viable all the time.

Of course, there are many details that would have to be worked out when developing a carbon tax, including how to tax each different type of fossil fuel and how to mitigate the burdens that those at the lowest income levels have to bear. A carbon tax also doesn’t take the place of subsidies to companies that produce energy through renewable means, but proponents argue it can help take the next step in the proliferation of those technologies.

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