Carbon Tax

Structure and calculation

A carbon tax is levied on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government usually sets a price per ton of carbon and then translates it into a tax on electricity, natural gas or oil.

A carbon tax is easy to implement as it can utilize existing tax collection mechanisms. A carbon tax can be collected per unit of energy (usually measured by British Thermal Units, or BTUs). Natural gas emits the least CO2 when burned, and coal the most, with petroleum (oil) products in the middle. Generally, one BTU from coal emits 30% more carbon dioxide than one BTU from oil, and 80% more than from natural gas. A carbon tax would follow these proportions, taxing coal more heavily than petroleum products, and much more than natural gas.³

Carbon that is included in a product such as plastic, but that is not burned would not be taxed. Similarly, carbon used in the production of energy that is permanently sequestered, rather than released into the atmosphere, would also be exempt.⁴

One example of calculation method is as follows: According to the US Energy Information Administration (EIA), emissions from petroleum are about 20 pounds of CO2 per gallon (2.4 kilograms per litre, 2.4 kg/L), so a tax of $100 per ton of CO2 ($110 per ton of CO2) would translate to a tax of about $1.00 per gallon ($0.26 per litre). For other emission resources, the numbers are: 19.564 pounds of CO2 per gallon of motor gasoline, 22.384 pounds of CO2 per gallon of diesel fuel, and 21.095 pounds of CO2 per gallon of jet fuel (2344.3 g CO2 per L of motor gasoline, 2682.2 g CO2 per L of diesel fuel, and 2527.7 g CO2 per L of jet fuel).⁵   Therefore, a tax of $100 per ton of CO2 translates to a tax of $0.978 per gallon of motor gasoline, $1.119 per gallon of diesel fuel, and $1.055 per gallon of jet fuel ($0.258 per litre of motor gasoline, $0.296 per litre of diesel fuel, and $0.279 per litre of jet fuel).

Advantages

 There are a number of advantages that tax supporters promote over other carbon reduction schemes.

• Carbon tax reduces consumption of fossil fuels. Supporters argue that if gas were $5 per gallon, people would drive less and stop driving SUVs.  If would spur innovation to conserve fuel and produce renewable energy.  They also argue that if the carbon tax were to be implemented for the coming decades, utilities would likely stop building coal-fired, carbon-intensive power plants.⁶
  

  This graph represents the economic effect of a carbon tax and shows how the tax level might best be set. The graph promotes the idea that carbon tax would be most efficient if set at a level that would reflect the marginal cost of abatement as well as the marginal damage costs of pollution.

  Source: http://www.globalpolicy.org/images/s...lcarbontax.gif. Author: Professor Elizabeth Bogan, Princeton University.

• Carbon Tax creates incentives for the development of clean energy and energy conservation. A carbon tax makes using  fuels such as coal and oil more expensive, thus making renewable energy emitting less or zero CO2 more attractive (e.g., wind power and solar power). It also makes low-carbon fuels (e.g. biofuels), conservation behaviors, such as bicycling, recycling, and usage of "green" products more appealing to individuals. In addition, the more cost-competitive alternative energy under a carbon tax mechanism will lead to more capital investments in infrastructure, facilities and technology development in this field.
• Carbon tax raises tax revenue. A carbon tax also raises tax revenue that can be used to subsidize environmental programs or low-income families. Many fans of the carbon tax support progressive tax-shifting, which means a shift of the tax burden from federal income tax and state sales tax.
• Carbon tax is more simple and stable. Compared to a cap-and-trade scheme, the price of carbon is predictable and stable in a carbon tax system. Businesses and utilities will easily know the price of carbon and its trend. They can make decisions on investments in alternative energy and energy efficiency programs accordingly.  

Disadvantages

 Even supporters of a carbon tax admit that there are barriers to implementing a carbon tax, particularly on a national and international level.

• Carbon tax is politically unpopular in the United States. There are some politicians who are concerned with resistance from their constituencies and are worried that it would upset voters. Policy makers are also concerned that higher gas taxes would raise revenue but do little to curb pollution. On the other hand, the public is also worried the abuse of the tax revenue.⁷ Carbon Tax could become  a revenue grab by desperate governments, that they create artificial winners and losers in the economy and that, if they are not at least done in step with other countries, they will simply drive jobs and business offshore to cheaper locales.⁸
• Cap and trade programs have gained the recognition worldwide, which makes it difficult for the implementation of a carbon tax. After the implementation of the Kyoto Protocol, a global cap and trade program, the cap and trade system became well-recognized worldwide. In the United States, the voluntary cap and trade market – the Chicago Climate Exchange and a successful cap and trade program on sulfur dioxide emissions have made capped programs the norm.
• Possible negative impact on consumers and economy. There are concerns that the components of carbon tax added to the current tax structure will likely to have potential impact on consumers and economic growth. Especially, carbon tax is likely to have bigger impact on ppor communities that already struggle to heat their homes or use their vehicles for work. As for the economy as a whole, a carbon tax can skew the development of different sectors. For example, in 1990s, Ontario's long-running Fair Tax Commission rejected posing carbon taxes, arguing they would distort too many key sectors of the economy, manufacturing and transportation in particular.⁹

Implementation

Finland  was the first country to adopt a carbon tax.¹⁰ The tax went into effect¹¹ in 1990, at Mk 6.66 ($1.45) per metric ton of CO2. While originally based only on carbon content, it was subsequently changed to a combination carbon and energy tax . The current tax is €20 per ton of CO2 (€75 per ton of carbon) or $27.01 per ton of CO₂ ($101.28 per ton of carbon) in U.S. dollars (using the August 17, 2007 exchange rate of USD 1.00= Euro 0.7405).¹²

Sweden enacted a tax on carbon emissions in 1991.¹³ Currently, the tax is $150 per ton of carbon, but no tax is applied to fuels used for electricity generation. In addition, industries pay only 50% of the tax.¹⁴ Non-industrial consumers pay a separate tax on electricity. Fuels from renewable sources such as ethanol, methane, biofuels, peat, and waste are exempted from the taxation. As a result, the tax resulted in a heavy expansion of the use of biomass for heating and industry. The Swedish Ministry of Environment forecasted in 1997 that by 2000 the tax policy would have reduced CO₂ emissions in 2000 by 20 to 25%.¹⁵ On September 17, 2007, Sweden's government announced that it will increase its carbon taxes to address climate change. Petrol prices will go up 17 öre per litre, with the increase in fuel tax calculated on the basis of a 6 öre tax increase per kilo of CO₂ emitted. ¹⁶

Netherlands changed its fuel charge system in 1992 to a fuel tax, and in 1996 the Regulatory Energy Tax was introduced. The 1996 regulatory energy tax was the first tax introduced for environmental reasons.¹⁷

The United Kingdom introduced a "climate change levy" in 2001 on the use of energy in the industry, commerce and public sectors. Revenues are used to offset cuts in employers' National Insurance Contributions and to provide support for energy efficiency and renewable energy. Rates are set to 0.15p/kWh for gas ($0.003) , 0.07p/kWh for liquid petroleum gas ($0.0014), 0.44/kWh ($0.0087) for electricity and 0.12p ($0.0024) for any other taxable commodity (using the August 17, 2007 exchange rate of USD 1.00= GBP 0.503). There are various exemptions including for electricity generated from new renewable energy and fuel used for "good quality" combined heat and power. ¹⁸

New Zealand started its carbon tax plans in 2005 and planned to enact a carbon tax equivalent to $10.67 (of U.S.) per ton of carbon (based on conversion rate of USD 1.00 = NZD 0.71). The original design of the tax structure was revenue-neutral, with proceeds used to reduce other taxes.¹⁹ However, a new government determined that the carbon tax woulnot cut emissions enough to justify the costs, and the tax was abandoned.²⁰ According to the Carbon Tax Center addendum: In September 2007 the government unveiled a proposed emissions cap-and-trade scheme intended to cover all carbon emissions. While we don't yet have a link to the government's proposal, the NZ Green Party's Preliminary Assessment provides some details.²¹

Boulder, Colorado was the first city in the United States to implement a tax on carbon emissions from electricity begining on April 1, 2007. The tax is approximately equivalent to $7 per ton of carbon and will cost the average household about $1.33 per month. Households that use renewable energy are eligible to receive an off-setting discount. The City of Boulder expects the tax to generate about $1 million annually until it expires in 2012. The revenues will be used to fund Boulder's climate action plan to further reduce energy use and to comply with the Kyoto Protocol. ²²

Quebec (Canada's second largest province) began collecting a carbon tax on Hydrocarbons on Oct. 1, 2007. Though the tax rate is quite small, it made Quebec the first North American state or province to charge a carbon tax.

Power prices are essentially unaffected at Quebec at March 2008 exchange rates. The petroleum tax rate equated to just 3.1 cents (U.S.) per gallon of gasoline and 3.6 cents for diesel.  However, only a tiny fraction of electricity in Quebec is generated from fossil fuels (virtually all electricity is generated from hydropower).

British Columbia announced a revenue-neutral carbon tax in Feb. 2008 . The tax would be phased in, starting at a rate of $10 per ton of carbon dioxide equivalent (CO2e) emissions released from the burning of each particular fossil fuel. This initial rate would be translated to a tax of $0.0241 per litre of gasoline purchased; $0.0276 per litre of diesel fuel; $0.4988 per gigajoule of natural gas; $0.0276 per litre of heating fuel oil; $20.79 per ton of Canadian bituminous coal; and $17.72 per ton of sub-bituminous coal. Although the initial price per ton of CO2e is lower than that advocated in many jurisdictions, the tax rate would increase to $15 per ton on July 1, 2009; $20 per ton on July 1, 2010; $25 per ton on July 1, 2011; and $30 per ton on July 1, 2012. For gasoline, the 2012 rate would translate to a tax of approximately 7.24 cents per litre.²³  

Resources

The US Environmental Protection Agency's National Center for Environmental Economics webpage on carbon taxes provides a good overview of the topic.

Footnotes

1. What's A Carbon Tax, Carbon Tax Center.

2. What's A Carbon Tax, Carbon Tax Center.

3. What's A Carbon Tax, Carbon Tax Center.

4. :What's A Carbon Tax, Carbon Tax Center.

5. "Fuel and Energy Source Codes and Emission Coefficients". Voluntary Reporting of Greenhouse Gases Program. U.S. Department of Energy (DOE), Energy Information Administration (EIA). http://www.eia.doe.gov/oiaf/1605/coefficients.html.

6. : Sally Deneen, Carbon Tax, thedailygreen.

7. Monica Peasad,On Carbon, Tax and Don’t Spend ,the New York Times.

8. The carbon tax: The pros and cons of a tax on fossil fuels, CBCNews

9. The carbon tax: The pros and cons of a tax on fossil fuels, CBCNews

10. Environmentally Related Energy Taxation in Finland, fact sheet, Finnish Ministry of the Environment.

11.  "Where is Carbon Taxed," Carbon Tax Center, updated July 23, 2008, accessed Jan 6, 2008.

12. 11.1.5.2. Energy/carbon Taxes,National Center for Environmental Economics.

13. Bengt Johansson, Economic Instruments in Practice 1: Carbon Tax in Sweden, Swedish Environmental Protection Agency.

14. Survey of International Legal Responses to Climate Change, Working Paper,Environmental Defender’s Office WA Inc April 2008.

15. Bengt Johansson, Economic Instruments in Practice 1: Carbon Tax in Sweden, Swedish Environmental Protection Agency.

16. Carbon taxes raised to tackle climate change, The Local, Sweden's News in English.

17.  Greening of the Tax System in the Netherlands, UK DEFRA.

18. Climate change agreements, Department for Environment, Food and Rural Affairs, UK.

19.  Pete Hodgson, Government adds detail to 2002 carbon tax policy.

20. Rod Myer, Carbon tax too costly, says NZ.

21. "Where is Carbon Taxed," Carbon Tax Center.

22. Katie Kelly, City Approves ‘Carbon Tax’ in Effort to Reduce Gas Emissions.

23. British Columbia Proposes Broad Carbon Tax,Torys on Climate Change.