What is 'Energy Tax'

An energy tax is a surcharge on fossil fuels such as oil, coal and natural gas. The purpose of an energy tax is to give businesses and consumers an incentive to use alternative energy sources, such as solar and wind power, and to raise revenue for the government to help finance public spending on clean and sustainable energy solutions.

Some environmentalists believe energy taxes are necessary to reduce the greenhouse gas emissions that are theorized to cause global warming. Opponents of energy taxes warn of their unintended consequences, such as increased prices of virtually everything, which could reduce the amount of disposable income for families and individuals.

BREAKING DOWN 'Energy Tax'

Energy taxes can exist in a number of forms, from regulations that require automakers to reduce carbon dioxide emissions to surcharges on electricity bills. Another example is a proposed U.S. carbon tax that proponents hope to implement on the federal or state level, or both. A carbon tax is a fee paid by businesses and industries that produce carbon dioxide through the burning of fossil fuels. Currently, the U.S. has no formal carbon tax policy.

Energy Tax Effectiveness

Historically, most countries that have levied an energy fee, such as a carbon tax or a cap-and-trade system, have seen a corresponding decrease in carbon emissions. In the United Kingdom, for example, carbon dioxide emissions have fallen steadily since 1990. By 2016, emissions in the U.K. dropped to their lowest levels since the last decade of the 19th century. Ireland, previously one of Europe’s highest producers of greenhouse gases on a per-capita basis, with levels nearing those of the United States, has seen its emissions drop more than 15 percent since implementing an energy tax in 2008. Denmark and Sweden, both of which adopted a carbon tax in the early 1990s, have seen carbon emissions decline by 25 percent and 20 percent, respectively. Since 2008 when British Columbia implemented a carbon tax, overall fuel use in the country has fallen 16 percent.

One rare exception to the rule has been Norway. Its emissions actually increased after its carbon tax was enacted in 1991, mainly because of the significant growth of the nation’s oil- and gas-driven economy. Australia repealed its energy tax legislation in 2014, citing economic constraints, only to see its greenhouse gas emissions jump significantly after six consecutive years of declines.  

Objections to an Energy Tax

Many opponents of an energy tax point to the potential economic burden of such a policy. An energy tax typically increases the prices of gasoline and oil, which could pressure corporate profit margins and consumers' disposable income. Others believe that any reduction in greenhouse gas emissions as a result of an energy tax would not be significant enough to warrant the cost. Yet others contend that the link between greenhouse gases and global warming has yet to be scientifically proven, and believe that an energy tax would have no measurable effect on the conditions of the future climate.

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