19 - Is Carbon Tax Restraining Carbon Emissions?
Updated: Jan 7, 2019
As we are observing increase in CO2 emissions partially resulting from human activities, jurisdictions and governments put in place carbon policies to target CO2 emissions which result from fossil fuels consumption. Such carbon policies are:
the Cap & Trade system
the Carbon Tax system (which is more popular)
This article ONLY discuses Carbon Tax system
What is Carbon Tax?
Carbon Tax is a fee imposed on businesses, levied on the amount of CO2 emissions that resulted from the burning or the combustion of fossil fuels. It aims to:
Disincentivise the use of fossil fuel by putting a levy on its consumption, aiming to make it prohibitive in pricing
promote the use of environment-friendly sources of energy by making them economically attractive
What is the rational behind Carbon Tax?
Carbon Tax is a quantification of the estimated environmental damage (current or future) caused by the additional CO2 emitted to the atmosphere by business activities, which are usually industrial and transportation related.
In the past, the cost of restoring the damage caused by climate change was borne by the society (or the government). Nowadays, regulators want to attach a monetary value to the cost of pollution and make the polluter pay for it, rather than the society.
In Canada, the Carbon Tax is $10 per tonne in 2018, and will rise by $10 per year to $50 per tonne in 2022
What are the fossil fuels subject to Carbon Tax?
Oil (including Bitumen)
Natural Gas
Coal
Carbon Tax is applied on Fossil Fuels only, and not on other Carbon-Based Fuel such as Bio-Fuel
What are the benefits of applying a Carbon Tax?
it establishes social efficiency by making businesses pay for the environmental impact caused by their CO2 emissions
it generate government revenue, which can be spent on preventing and mitigating CO2 emissions impact
it encourages businesses and consumers shift from fossil fuels to environment-friendly sources of energy
with time, it helps reduce environmental costs associated with CO2 emissions
it helps creating a new economy that is more environment-friendly
What is preventing Carbon Tax from being effective?
taxes are generally prohibitive to business growth and might discourage investment
increase in Carbon Tax evasion activities, such as misrepresentation of CO2 emissions
difficulties in reporting the amount of CO2 emissions
difficulties in estimating a right and fair amount for environmental damage caused by CO2 emissions
increase in businesses' overhead cost due to the additional reporting and measuring requirements
increase in government spending due to the additional auditing, reporting, and tax collection activities
relocation of businesses to tax-relaxed jurisdictions. This will only results in shifting the source of CO2 emissions without reducing them
Carbon Tax cost will be transferred to consumers as part of the product cost
Final Words
With today's globalization, any tax can't be decided in isolation of other jurisdictions' fiscal policies, especially that businesses have full mobility.
An effective Carbon Tax system should be agreed among and applied by several jurisdictions; this ensures that the jurisdiction which applies a carbon policy is not operating at a competitive disadvantage.
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