The purpose of Carbon Tax – Pros and Cons

Researchers have been attempting to estimate the monetary value of damages in future resulting from climatic change. This change is associated with a steady increase in carbon dioxide emissions in every given year hence resulting in an attached value of the benefit from commensurate reduction of the toxic emissions. This measure is usually known as the social cost of carbon (SCC). SCC has been estimated by a task force of the federal government resulting from 1-ton carbon dioxide emission reduction in the year 2010 to be approximately $21 US dollars. Those values were found to be highest when the researchers consider the significant weight on the long-term outcomes. The severity of this matter cannot be also downplayed especially when we imagine the damages assuming climate change could increase more sharply in the coming years. This could lead to a lot of catastrophic occurrences.

While the world delays efforts that are meant to reduce emissions, the risks associated with such emissions piles up to alarming levels. As days go by, larger amounts of carbon dioxide coupled with other toxic gases are emitted. Given the inherent uncertainty in predicting effects of change in climate and its possibility of triggering catastrophic effects, lawmakers may have to view a carbon tax as reflection of the will of the society to pay in order to reduce the risk in future of potentially expensive damages.

The production of carbon dioxide is widely known to have contributed to social/environmental undesirable effects such as health issues and global warming. This carbon pollution is an eternity that is notoriously negative. It is a cost generally imposed on the whole of society and not just meant for an individual consuming a certain product whose processing is associated with carbon emission. For example, if you use a car, the costs are felt by the whole society in one way or another. Since certain carbon-intensive industries are associated with negative externalities, the cost of production to the society is greater than the private cost on an individual. If its in a free market, the negative externalities may not be included in the price leading to overconsumption and inefficiency in the society. We can say in that case; there is a missing market since the external cost associated with carbon emissions are not considered or ignored.

The main purpose of taxing carbon is to internalize what is deemed external. This means that the final price of a good is supposed to include both the external and private costs-not just private. In general terms, it operates on the principle that the polluter has to pay in order to be allowed to continue to pollute. This policy was formulated and included in international law at The Rio Summit held in 1992. It simply means that those who are responsible for environmental damages have to be made to pay the costs of doing so to the society. Theoretically speaking, the tax should be equated to the external cost. Therefore, the price to be paid by the consumer should be a social cost. In this case, we assume that the demand for carbon associated items will fall hence balancing with the social costs. Its more like a win-win situation.

Benefits of Carbon Tax

1. Encourages alternatives.

Pricing carbon emissions higher will compel firms and consumers to develop alternatives to heavy carbon emitters and more efficient engines in order to evade or reduce the levy. Industries and firms will, for example, reconsider the use of hydrogen or solar power run engines. This is because there will be minimal or no damages associated with them to the environment hence lower carbon tax levy.

It might also encourage individuals to walk or cycle to work. This would further lead to health benefits such as minimum risk of heart attack because of exercises and at the same time minimize the levels of emissions as they would have used automotive.

Carbon tax would also make it economically feasible to acquire electric energy from green sources such as solar energy. If more green sources are developed, it will also make us less dependent on oil and consequently averting adverse future energy insufficiency in the world when demand surpasses supply.

It will help make a long awaited shift to post-oil economy faster.

2. Raising Revenue.

The revenue acquired from the carbon tax levy could be useful in subsidizing alternatives such as green energy. Conservancies and other areas rich in green resources can then receive enough funding enabling them to operate more effectively.

3. Leads to a socially efficient outcome.

It makes each and every person to incur social cost and by so doing reducing unnecessary, excessive consumption of resources. Every individual will consume only what is enough in order to minimize costs.

Problems of Carbon Tax

1. Production of goods may shift to those countries that have lower taxes imposed on carbon hence creating pollution havens. This will also disadvantage those countries that have high carbon taxes imposed on their firms. Their products would not sell in international markets since their substitutes from pollution havens are at lower prices.

2. The tax administration costs may be quite high reducing its possible efficiency.

3. Difficulty in knowing the level of external cost plus the amount of tax that should be imposed.

4. There is a high possibility of tax evasion. This is because firms may be compelled to hide their levels of carbon.

5. Before alternatives to replace the ones imposed on the carbon tax are developed, industries may find it hard fully to meet the demand for goods they produce.Consequently, they can't afford to increase their level of production as this would attract more taxes. This situation leads to unhealthy economic environment..

6. Customers may not accept or appreciate even the slightest increase in prices of commodities due to the carbon tax imposed on the industries. While this may not be a reasonable economic development, it is a reality and one of the most pronounced difficulties of implementing the carbon tax.

7. A small increase in capital costs due to the carbon tax may curtail economic progress in third world/developing countries even when the developed world may not be affected. This may be unfair and lead to economic deterioration in the developing countries.

Despite the fact that this carbon policy is widely adopted by both governments and non-governmental bodies, it’s quite clear that the implementation of carbon tax levy has a number of demerits as well. Carbon tax, therefore, in my opinion, should have been implemented only after a critical examination to determine whether it will be of social benefit to the world at the long-run or not. Every individual should also be made to understand the aims of the policy.

References

Publishing, O. E. C. D. (2011). OECD Economic Surveys. Paris: Organisation for Economic Co-operation and Development.