What is Carbon Tax?

A carbon tax is a form of carbon pricing by taxing fuels that contain carbon. Every hydrocarbon fuel (coal, petroleum, and natural gas) contains carbon which is released as carbon dioxide (CO2), the main greenhouse gas in our atmosphere, once these fuels are burned. A number of countries have implemented carbon taxes or energy taxes that are related to carbon content. Most environmentally related taxes with implications for greenhouse gas emissions are levied on energy products and motor vehicles, rather than on CO2 emissions directly.

From a theoretical economic perspective, carbon taxes help to address the problem of emitters of greenhouse gases by making them pay the so called “social cost” of their actions. However, carbon taxes can be viewed as regressive taxes, in that they may directly or indirectly affect low-income groups disproportionately.

“Raising prices reduces demand”

mankiw500wideAccording to Gregory Mankiw, Professor of Economics at Harvard University, who was featured in the newest NatGeo documentary “Before the Flood”, lesson number 1 of Economics is “if there is a tax that raises the price of some product/service, people will tend to consume less of it”. Mankiw, who has worked with former Republican candidates such as Mitt Romney and John McCain and with the Bush administration, uses this argument as a justification for the implementation of a carbon tax. According to estimations, by 2060, climate change will have cost a total of $44 Trillion USD and the professor’s view is that this tax could help tackling global change by dodging people into the direction of doing the right choices and adopt a more sustainable lifestyle.

Carbon tax may not be the answer

But is Mankiw correct? …In my opinion, carbon tax may not be the solution to the climate crisis we are facing today and will face throughout the rest of this century, and to justify my disbelief I will give two reasons.

First, Carbon tax is relying on the same sort of beliefs as trickle-down economics and Keynesian policies, which is that economics can predict exactly the behavior of the masses, thus regarding people as discrete, easily predictable parameters. The problem with carbon tax is that the consequences may not be that easy to predict, thus undermining the feasibility of such assumptions, as they often fail to consider factors that lead to completely different outcomes in the public’s behavior.

The goal of this kind of mitigation policy is to catalyze the transition from fossil fuels to renewable energy sources, in particular with regard to vehicles and heating. What carbon tax would do is to put the financial burden of climate change on citizen’s wallets, thus putting people in an even tighter stranglehold through yet another tax, slashing their purchase power.

A vicious cycle

carsIf carbon tax is imposed, I am concerned that people won’t be able to afford to switch to carbon free energy sources and transportation due to scarcity and uncompetitive prices. Then the vicious cycle begins: people who have less purchase power will be obliged to pay the carbon tax and their purchase power will be reduced even further.

industryAdditionally, carbon tax applied on industries may not drive those industries to adopt low carbon technologies, due to the fact that they could easily dodge such tax by increasing prices and then the consumers would be the ones absorbing all the impact. Another weakness of the carbon tax is that it doesn’t necessarily imply a reduction of carbon emissions but rather allows governments to “make a profit” out of it, as it derives income from taxes.

There is now the urgent need to cut carbon emissions in order to meet the Paris agreement goals of a 1.5ºC warming. Therefore, one can use Ronal Reagan’s own words to say “Carbon tax is not the solution, it is part of the problem”.2

Alternatives to carbon tax

There are a number of ways in which we could tackle carbon emissions more effectively and none of them requires increasing taxes on the working people, for example:

  • Having an efficient, high-quality public transport network with affordable ticket prices,
  • Subsidizing electric vehicles, making them more affordable,
  • Or even banning carbon emitting energy sources and vehicles from the market, the most extreme but also the most effective measure.

In this scenario, with the absence of carbon emitting energy sources on the market, people will switch to clean (renewable) energies and we would finally be in a position where our targets could be achieved.

Let’s look at asbestos as an example: the use of asbestos is forbidden since it poses a major threat to public health; no one can even buy asbestos to use as a construction material. This solves the asbestos problem and we no longer have to worry about the occupational health and safety of people as to what exposure to asbestos concerns. Now, if we adopt the same position towards dirty energy sources and vehicles, we could finally take the step that needs to be taken and open the door to a carbon-free future.