Carbon Dioxide Tax

DEFINITION of 'Carbon Dioxide Tax'

A carbon dioxide tax is a tax on businesses and industries that produce carbon dioxide through their operations. The tax is designed to reduce the output of greenhouse gases and carbon dioxide, a colorless and odorless incombustible gas, into the atmosphere. The tax is imposed with the goal of environmental protection.

BREAKING DOWN 'Carbon Dioxide Tax'

A tax designed to mitigate or remove the negative externalities of carbon emission, a carbon dioxide tax is a type of Pigovian Tax. Carbon is found in every kind of hydrocarbon fuel (including coal, petroleum and natural gas) and is released as the harmful toxin carbon dioxide (CO2) when this kind of fuel is burned. COis the compound primarily responsible for the "greenhouse" effect of trapping heat within the Earth's atmosphere, and is therefore one of the primary causes of global warming. 

Government Regulation

It is also referred to as a form of carbon pricing on greenhouse gas emissions where a fixed price is set by the government for carbon emissions in certain sectors. The price is passed through from businesses to consumers. By increasing the cost of greenhouse emissions, governments hope to curb consumption, reduce the demand for fossil fuels and push more companies toward creating environmentally friendly substitutes. A carbon tax is a way for a state to exert some control over carbon emissions without resorting to the levers of a command economy, by which the state could control the means of production and manually halt carbon emissions.

Examples of Carbon Taxes

Carbon taxes have been implemented in a number of countries around the world. They take several different forms, but most amount to a straightforward rate of taxation per ton of hydrocarbon fuel used. The first country to implement a carbon tax was Finland, in 1990. That levy currently stands at $24.39 dollars per ton of carbon. The Finnish were quickly followed by other Nordic countries; Sweden and Norway both implemented their own carbon taxes in 1991. Starting at a rate of $51 per ton of CO2 used in gasoline (the tax would later decrease considerably), the Norwegian tax is among the most stringent in the world. 

Failed Carbon Taxes

Most forms of carbon taxation have been deployed successfully, but Australia's failed attempt from 2012-2014 stands in stark contrast. The minority Green party was able to broker the carbon tax during a period of political stagnation in 2011, but the tax never garnered the support of either of the main parties in Australia, the left-leaning Labor Party (who reluctantly agreed to the tax to form a government with the Greens) and the center-right Liberals, whose leader Tony Abbott spearheaded the 2014 repeal. Like most economic initiatives to combat climate change, carbon taxes remain highly controversial.

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