Greenhouse gases, specifically Carbon Dioxide, have historically had a negative impact on the health of those living on our Earth. The Intergovernmental Panel on Climate Change reported that approximately 57% of greenhouse gases emitted into the Earth’s atmosphere is CO₂. As a heat-trapping greenhouse gas, CO₂ is a “negative externality on the climate system” of which high-carbon emitting firms substantially contribute to (Staudt, 2008). Economists, environmentalists and politicians have considered taxing the firms that burn fossil fuels “at a rate that reflect the harm that they impose on their community” (Nordhaus, 1970). This tax is known as the carbon tax, creating financial incentives to solve the pressing climate change issue that all countries face and economists have argued that implementing a high carbon tax is the most cost-effective and efficient method to addressing greenhouse gases.
Paid for by electricity generating companies, a carbon tax is priced on the carbon content fossil fuels. A higher carbon tax will increase the cost of emitting CO₂ whilst rewarding low carbon innovations. Although research by the Department for Energy and Climate Change (DECC) found a negative impact for business energy bills making compensation mechanisms necessary, DECC concluded that there was a positive impact on household energy bills but a “Coal is the most carbon intensive fossil fuel producing around twice the carbon dioxide per unit of electricity generated as gas” (Hirst, 2018).
95% of economists surveyed at the IGM Economic Experts Panel in December 2012 and December 2011 agreed that a tax on the carbon content of fuels would be a less expensive way to reduce carbon dioxide emissions that would a collection of policies such a ‘corporate average fuel economy’ requirements for automobiles. With corrective taxes, polluting firms must pay a tax to the government. With pollution permits, polluting firms must pay to buy the permits. (Even firms that already own permits must pay to pollute: The opportunity cost of polluting is what they could have received by selling their permits on the open market.) Both corrective taxes and pollution permits internalize the externality of pollution by making it costly for firms to pollute (Mankiw, 2015). “A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels” (Hirst, 2018).
Social Importance
Evidence suggests that the carbon tax has played a role in encouraging a shift from coal to gas generation since its introduction in 2013. Gas emits less CO2/MWh than coal, therefore, it can also assist in the reduction of GHG emissions.
Successful because it creates economic, social, and political incentives to invest in decreasing the amount of carbon that their firms or hse hold emit.
Firms are reluctant to the tax because they are concerned about being at an economic disadvantage, however, the government can model the UK that has agreed to apply privileges to those who are vulnerable to an increase in competition. The UK has implemented it into their policies, however, their only reluctance stems from the rest of the world’s reluctance to implement it. If only one countries firms have to pay the carbon tax, then those firms will be at an economic disadvantage to other firms who operate in countries that do not have the carbon tax. Some firms and power companies support the CPF because it encourages investment in low-carbon power generation
Environmentalists support the carbon tax because of the final aim of the tax, which is to lower the amount of emission.
Politicians support the carbon tax because
Economic Principles (concepts and applications)
Taxes
One of the advantages of using environmental policy tools which work through market mechanisms — like taxes, subsidies, and transferable permits — is that the final decisions on resource use and goods production are left up to firms and individuals. The government acts to modify market outcomes, but not to determine the exact result.”
Elasticity
Suppose that a carbon tax T is added into the price. For a given quantity, the supplier’s price will be the old price plus the amount of the tax, and the supply curve will shift up to S*. The new equilibrium is at point B, the quantity is the target Q1, and the price will increase to P1. Note that the price increase will be less than the tax, although if the demand curve is fairly steep (i.e., inelastic, or relatively insensitive to changes in price), the increase in the price will be pretty close to T (Gordon, 2012)
Conclusion
In conclusion, emission may not necessarily be decreased with a the implementation of a carbon tax. Firms “can pollute as much as they want by paying the tax,” however, their willingness to pay, based on x, will decrease the higher the carbon tax becomes,
Appendix
Figure 1:
Source: Mankiw