In a carbon tax system, the government declares that for every tonne of carbon dioxide you put into the atmosphere, they will collect a certain price. This might be applied on the producer side (taxing oil companies, power plants, etc.) or on the consumer side (taxing the general public at the gas pump, on electric bills, etc.). The revenue collected can then be used either to: a) lower taxes on something else or b) fund research towards less polluting or more environmentally-beneficial energy sources. The theory is that, by raising prices either companies will be motivated to come up with technologies which are better for the environment, or ordinary people will be motivated to make energy-saving decisions.
I believe there are at least four ways in which a carbon tax is a better solution than an emissions permit market.
1) Cost certainty: Companies trying to budget for the future like to know, as much as possible, exactly how much something they must pay will cost. A carbon tax has this advantage; because the government sets the rate in advance, budgeting is simpler than in an emissions market that experience has shown is often volatile. The European Union has been using a cap-and-trade system since 2005 to control greenhouse gas emissions. Prices have been volatile; there was a crash in 2007 in which permits were being traded for next to nothing. Between 2008 and 2013, prices for a certificate for one tonne of carbon dioxide have ranged between €2.75 and €20, a seven-fold difference. Now certainly the Europeans have an unusually volatile market — California’s carbon price has been more stable, varying between $12 and $19 over the past four years. But no matter what the magnitude, ups and downs in the price are unavoidable.
If you’re an electric company and you want to figure out how much the right to send a few thousand tonnes of carbon dioxide into the atmosphere will cost you, a variable price won’t be that helpful. A set carbon price at least provides cost certainty, which helps companies make more informed decisions about whether to be more energy-conscious. Especially in Canada where businesses have a risk-averse streak, a tax of known price strikes me as more suitable.
2) (Relative) Simplicity: OK, no tax law will ever be “simple”, as anyone who’s ever tried to understand the tax code when filing their taxes will know all too well. However, a cap-and-trade system requires an entire system to be set up to monitor exactly how much carbon dioxide businesses are emitting, and a market for the trading of permits, which could potentially be pretty complex or costly. Meanwhile, a carbon tax could be collected using tax agencies which already exist. For this reason, carbon taxes have generally been fairly quick to implement.
3) Broad Coverage: In theory, a cap-and-trade system could cover all emissions. However, due to the complexity of getting every business in the country into the system, governments usually decide it’s too much of a hassle and impose the cap only on businesses in certain industries. So in practice, carbon taxes are usually more fair and effective in that all pay their share, instead of just a few industries while leaving businesses in exempted industries to keep emitting.
4) Better use of revenue collected: In a cap-and-trade system where certificates are simply being given away based on how much a company has emitted in the past, the money ends up flowing to businesses which can quickly reduce their emissions, increasing their profit. By contrast, a carbon tax allows the money to go to the government, which then has the option of investing it in “green” technologies or returning the money to consumers. I presume most citizens would rather have the money spent there than being given to companies. (Note: This point does not apply to cap-and-trade systems where certificates are auctioned to the highest bidder. In that case the revenue does go to the government with all the flexibility that the carbon tax provides.)
My counterpart believes that an emissions quota is a market-oriented system. But a tax (changing the price) is no more disruptive to the economy than a quota (changing the quantity). Either way, you’re intervening to make the market aware of an externality cost, and I think we agree that such an intervention isn’t a bad thing.
A possible unwanted side-effect of a carbon tax is that it is a regressive tax. The poorest also spend the largest chunk of their income on fuels, and thus end up getting the brunt of the impact of a carbon tax. However, this is where the revenue collected by the government becomes an advantage; some of that money can be paid out as credits to subsidize low-income households. In BC, the government actually went further, and after introducing the carbon tax gave all the money back to taxpayers in subsidies and tax cuts, leading to them now having the lowest income taxes on people making less than $100k a year in the country.
Let me close with a diplomatic note. At the end of the day, the tax system and the quota system both work towards the same goal: reduction of carbon dioxide emissions by changing people’s behaviour. Essentially, this is a “friendly” PCP; if you believe, as I do, that such incentives would be good for the future of our planet, this is a debate between good policy and better policy.
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