as Environment Policy
Effectiveness of Carbon Tax as Environment Policy
Climate change has emerged as a global challenge because unrestrained rising of global temperature would cause melting of glaciers and rise of sea level that would submerge land masses, change weather patterns with frequent incidence of hurricanes and floods and droughts. As an effective response to the challenge, global leaders have agreed to cut back emission of Green House Gases (GTG) to contain the global rise in temperature below 2 degree Celsius (Symon, 2013). Carbon dioxide, a major constituent of GTG, is released to the atmosphere on combustion of fossil fuels such as coal, oil, and natural gas. However, around 80% of the world’s energy is sourced from burning fossil fuel (Bodnar, & Turk, 2015). Therefore, reduction in CO2 emissions has a direct implication on energy production. Different environmental policies have been applied to restrict CO2 emission all over the world, carbon tax being one. This paper describes carbon tax, its application, economic principles behind the policy, and pros and cons of the policy.
Carbon Tax
A carbon tax is a market-based approach that places a price on emissions. It is described as a levy on the carbon content of fossil fuels. Almost all of the carbon present in fossil fuels is converted to carbon dioxide during the combustion process. Thus, a carbon tax is equivalent to an emission tax on carbon dioxide release to the atmosphere (Pachauri et al., 2015). The objectives behind the carbon tax is to (Carbon tax, 2016)
encourage improvement in energy efficiency in the processes;
influence people to use less fossil fuel;
ensure emitters of CO2 gas pay for emissions i.e. polluters pay principle;
make alternative clean energy sources cost-competitive.; and
encourage innovation in cleaner technologies.
Present costs of energy exclude the environmental cost that is accrued due to emissions of CO2 and subsequent environmental damages that the emissions cause. A carbon tax puts the cost on energy consumption, thus including full social cost. In general carbon tax applies to the purchase of fuels by the users. It is easy to administer and consumers understand the implications. Besides the social benefit, a carbon tax offers economic benefits of higher revenue generation for the state.
British Columbia: A Success Story
The province of British Columbia has successfully implemented a revenue-neutral carbon tax on July 1, 2008 with a tax rate of $10 per tonne of CO2 equivalent emissions in each fuel. The rates were increased annually by $5 per tonne to reach $30 per tonne in 2012. The carbon tax was introduced after the proposal received a popular mandate. One of the key factors for the success of carbon tax in lowering GHG emissions in British Columbia is all carbon tax revenue is recycled back to the taxpayers and is not used to fund programs or other initiatives. Low-income individuals who are affected most by a carbon tax receive special assistance. Relief is also provided to businesses to make their operation viable.
A study carried out by an independent consulting company, has found that the carbon tax has potential to reduce emissions up to 3 million tonnes of CO2 equivalent annually in British Columbia in 2020. The model while calculating the figures excluded the effect of other GTG reduction efforts (How the carbon tax works, n.d.).
A statewide initiative in Washington to impose a carbon tax on fossil fuels did not receive popular support when it was put to vote on November 8, 2016. The initiative was opposed due to budgetary and other concerns (Kamb, 2016). However, there are initiatives in other states and at the federal level in the United States to impose a carbon tax.
Economic Principles in the Design of the Policy
Each individual or organization while making economic decisions, balances the cost against the benefits. When persons undertake any economic activity that involves the consumption of fossil fuel such as buying a bunch of roses, switching on an air conditioner, or driving a car, they compare the personal benefits against the cost of the economic activity. However, persons do not consider the environment cost of CO2 emission resulting from their activities. The carbon tax is an economic solution to include the social cost of CO2 emission in the individual consumer’s decisions (Do economists all favour a carbon tax?, 2011). On the adoption of a carbon tax, the cost of producing goods and services would increase relative to the amount of carbon dioxide emission. The higher cost due to the carbon tax, therefore, would work as an incentive for the companies to manufacture products in more efficient ways with respect to CO2 emissions. As the cost of items would increase proportionately to the consumption of fossil fuels in their manufacturing, household consumption of these items would decrease in comparison to other items (Effects of a Carbon Tax on the Economy and the Environment, 2013).
The effect of carbon tax on the industry can be described through an example. On implementation of a carbon tax, an energy-intensive industry has to pay $10,000 per year as a carbon tax. The industry implements energy efficient processes by investing $10,000 and cuts down CO2 emission to reduce carbon tax by $5,000 per year. The industry makes net savings of $5,000 per year from the third year after recovering initial investment of $10,000.
Adverse Effect of Carbon Tax
Often the performance of a tax system is evaluated based on economic criteria of efficiency, equity, and simplicity. Setting a tax system gets complicated because of these criteria conflicts with each other (Reducing the Deficit: Spending and Revenue Options, 2011). Taxes make taxed activities costly in comparison to other things. They also reduce the rate of savings. Imposing carbon tax would generate revenue, but there would be a reduction in revenue generation from income and payroll taxes, and other sources.
A carbon tax, if not applied universally, would lead to carbon leakage and instead of reduction, this could result in an increase in overall carbon dioxide emissions (Reinaud, 2008). A company to remain competitive maintains its market share and profit. But, implementation of carbon tax increases cost of its inputs, reduces its profit margin compared to the international competition, thus affecting its competitiveness and its ability to retain market share. To remain competitive, the company shifts to another region where environment norms are sloppy or its market share is grabbed by overseas competitors. In both these situations, there remains the possibility of an increase in CO2 emission resulting from the lenient environment norm of another region. However, industries exposed to a risk of carbon leakage receive a special allowance to safeguard their competitiveness.
If the revenue generated from a carbon tax is not considered, the effect of a carbon tax on the economy would be negative. A carbon tax increases the cost of goods and services diminishing purchasing power of the earnings of individuals. This means a reduction in real wages. Lower real wages decrease the overall supply of labor, There would be a decline in investment leading to reduction in overall output (Effects of a Carbon Tax on the Economy and the Environment, 2013).
Further, the cost of a carbon tax would not spread uniformly across all households. It has been found from studies that lower-income households spend a large percentage of their income on purchasing.
Good substitutes for the fossil fuels do not exist and innovation in this field is slow in pick-up. The renewable energy at existing technology cannot substitute fossil fuels because of the cost of generation and other issues. Though battery driven cars are available in the market, they are costly and have limitations in comparison to gasoline based cars.
Conclusion
Regardless of the origin of Carbon dioxide emissions, its adverse environmental impact is not limited to a specific country or region but is felt globally. However, many countries are reluctant to impose additional environment tax because the individuals and industries of that country have to bear higher tax burden but the benefit from reduced emissions would be shared by other countries. For effective environmental control, the same rate of the carbon tax should apply globally. This can be achieved through international cooperation.
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References
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