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 Australia repealed its energy tax legislation in 2014, citing economic constraints, only to see its greenhouse gas emissions jump significantly after six consecutive years of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.

RELATED TERMS
  1. Carbon Credit

    A carbon credit is a permit allowing the emission of carbon dioxide ...
  2. Kyoto Protocol

    An international agreement that aims to reduce carbon dioxide ...
  3. Montreal Carbon Pledge

    The Montreal Carbon Pledge is a commitment by investors to measure ...
  4. Emissions Reduction Purchase Agreement ...

    An Emissions Reduction Purchase Agreement (ERPA) is a legal document ...
  5. Green Levy

    Green Levy is a tax imposed by a government on sources of pollution ...
  6. Carbon Disclosure Rating

    A carbon disclosure rating is a numerical score that shows the ...
Related Articles
  1. Small Business

    Can Business Evolve In A Green World?

    Learn how global warming is starting to heat up America's corporate climate.
  2. Insights

    4 Things to Know About the Future of US Energy

    The fracking revolution has underpinned the U.S. energy industry in recent years, with positive trends likely to continue into the next decade.
  3. Investing

    The Largest Oil Companies Make a Pledge to Climate Change

    Here is how ten of the world's largest oil companies prepared for the UN climate change summit happening in Paris this month.
  4. Insights

    The Economics Of Solar Power

    Even with the massive strides made in technological innovation, sustainable energy has failed to usurp traditional fossil fuels.
  5. Insights

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  6. Investing

    Solar Energy to Cost Less Than Coal by 2021

    A Bloomberg New Energy Finance report says solar will kill coal much faster than expected.
  7. Investing

    Why Fossil Fuel Divestment Matters More Than Ever

    The withdrawl by the U.S. from the Paris Agreement won't stem the deflation of fossil fuels.
  8. Investing

    Apple Is Most Environment-Friendly Tech Company

    Apple, Google and Facebook earned top grades from Greenpeace, but Amazon and Netflix were criticized for their lack of energy transparency.
  9. Investing

    Trump Admin Says War on Coal Is Over

    The head of the Environmental Protection Agency (EPA) has vowed to repeal an Obama-era rule that was to limit greenhouse gas emissions from coal-fired power plants.
  10. Investing

    The US Is Becoming More Energy Independent

    Rising production and abundant shale oil and gas reserves are moving the US towards energy independence, which could happen by 2020
RELATED FAQS
  1. What is the carbon trade?

    The carbon trade came about in response to the Kyoto Protocol, which called for 38 industrialized countries to reduce their ... Read Answer >>
  2. How do government regulations impact the oil and gas drilling sector?

    Find out how government regulation of the oil and gas sectors is often positive for the large companies, but may be negative ... Read Answer >>
  3. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Trading Center