What is a Carbon Tax?

A carbon tax is a tax on fossil fuels according to the amount of CO2 they would produce on combustion (burning).  It would apply to all fossil fuels, and would be charged at extraction or importation of the fossil fuel. This tax would generally be passed on to consumers in an interim before alternatives are developed; but the revenue generated can also be refunded to taxpayers more generally so that average taxpayers are no worse off.

3 thoughts on “What is a Carbon Tax?”

  1. “It… would be charged at extraction or importation of the fossil fuel.”

    This is the critical point. There are two very different agendas here: “extraction” implies a global tax, which makes some sense, “importation” implies a national, unilateral tax, as advocated by Adrian in a previous post. The risk with the latter is that fossil fuel consumption will simply be displaced.

    Further, the Man in the Wardrobe Fallacy will undermine the effectiveness of the tax in reducing carbon emissions. Wealth transferred from high carbon emitters to low carbon emitters within the economy will cause a rebound effect in our overall national carbon emissions – we could simply end up emitting as much (or even more) carbon, more efficiently.

    Even if a unilateral carbon tax had some effect, the risk is that governments will not see the value of efficiency savings in the tax system before they see the impact of the policy on economic growth, and will rapidly abandon the tax or not create a high enough carbon cost to make a difference. And don’t underestimate vested interests – remember the fuel tax protests?

  2. Tim,

    “There are two very different agendas here: “extraction” implies a global tax, which makes some sense, “importation” implies a national [tax]”
    Agreed.

    “[which would be] unilateral [], as advocated by Adrian in a previous post.”
    Not necessarily. It could be a coordinated tax between nations. There are reasons to suppose that a coordinated tax might induce more cooperation than emissions trading, because the value of permits themselves would not be an issue.

    “The risk with the latter is that fossil fuel consumption will simply be displaced. ”

    To paraphrase, fossil fuels could be displaced in three ways:
    a) carbon-taxed consumers buy products created by industry in non-carbon taxed countries
    [this can be offset with border tax adjustments for embodied energy – if they can be made to work]
    b) the products don’t move, but the lowering of world price of fossil fuels stimulates more demand in developing countries.
    [we can’t do much about this, except encourage developing countries to join in until we have a global cap, or, equivalently encourage coal exporters to restrict the amount they supply (CoPEC). Why not do both?]
    c) in time: what we don’t burn now, we might burn later
    [We don’t know whether or not we will burn all the fossil fuels — but it’s still better to prevent burning stuff now. Maybe we will find sources of energy that are so cheap that we won’t need to burn fossil fuels]

    “Further, the Man in the Wardrobe Fallacy will undermine the effectiveness of the tax in reducing carbon emissions. Wealth transferred from high carbon emitters to low carbon emitters within the economy will cause a rebound effect in our overall national carbon emissions – we could simply end up emitting as much (or even more) carbon, more efficiently.”

    To paraphrase “Man in a wardrobe” fallacy is saying >
    In the short run, there is a rebound effect, but I would argue that effect is less than 100%; in the long run, it depends whether or not we burn all the fossil fuels.

    “Even if a unilateral carbon tax had some effect, the risk is that governments will not see the value of efficiency savings in the tax system before they see the impact of the policy on economic growth,”
    >

    “and will rapidly abandon the tax or not create a high enough carbon cost to make a difference.”

    “And don’t underestimate vested interests – remember the fuel tax protests?”

    Agreed; but the endowment effect can be separated from the incentive effect. I don’t think supply constrictions are enough – they will lead to new sources of oil being found that are even more damaging. We need demand constriction too; albeit in a way that encourages alternatives first.

    See:
    Climate Policy Given Political Constraints

    or

    Carbon Pricing

    In conclusion, I think these rebound issues are serious issues. I will note that these criticisms apply equally to cap-and-trade schemes and taxes, for a given level of policy stringency, although Cap and trade schemes have FURTHER leakages too, associated with offsets.

    We should note that we are not solving the problem even if we were to eliminating emissions overnight from the rich countries. However, *even if* the only effect (say) of climate policy was to reduce domestic emissions would be to reduce the world price of fossil fuels, it would still be a good start, because we would be developing alternative sources of energy.

    I’m not sure of the magnitude of the short term rebound effects (I would estimate that they are quite small). Carbonomics http://stoft.com/p/carbonomics.html discusses the relative elasticities in question. Long term effects depend as to whether we burn all the fossil fuels or not, and that depends.

    regards
    S.

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