Carbon tax explained?

As global warming threatens the planet now more than ever, the pressure is on to take action. Of course, an effective way to do this is to look at the source of the issue. The main cause of climate change is the increase in levels of greenhouse gases in the atmosphere — most notably, carbon dioxide.

Carbon dioxide (CO₂) is the primary greenhouse gas produced through human activities. Since the start of the Industrial Revolution, human carbon dioxide emissions have reached more than 35 billion metric tons each year. To put this into perspective, volcanoes produce less than 1 billion metric tons annually.

Reducing emissions of CO₂ through human activities is crucial to tackling global warming and protecting the environment. For this reason, many governments are intervening and implementing some form of carbon pricing to dissuade high emitters from polluting the atmosphere by using carbon-based fossil fuels. One of the key ways a government can do this is by introducing a carbon tax.

In this article, we'll cover what carbon taxing is, how it works, and the advantages and disadvantages of implementing a carbon tax. We'll also run through the UK government's plans for bringing carbon emissions to net zero by 2050. So, let's jump in!

Carbon tax is an eco-tax imposed on companies and industries that produce carbon dioxide (CO₂) through burning fossil fuels during production and operations.

The tax is a strategic approach to reducing greenhouse gas emissions by passing the cost of emitting directly to those responsible for the CO₂ emissions. This, in turn, encourages emitters to reduce their contributions to carbon pollution and source more sustainable alternatives to carbon-based fuels.

Carbon tax is a type of Pigouvian tax, which is a tax on private individuals and businesses carrying out any market activity that creates adverse effects on society. These adverse effects are defined as costs not included as part of the product's market price. The purpose of the tax is to redistribute the cost of the negative side effects back to the producer.

In the case of the carbon tax, the negative side effect that is taxed is the production of greenhouse gases which damage the environment and contribute to climate change. The carbon tax is implemented to make it more expensive for companies to use carbon-based fuels; therefore, they have reason to find a more environmentally-friendly alternative. Furthermore, in alignment with the principles of a Pigouvian tax, the funds collected from the carbon tax can then go towards measures that reduce the impact of greenhouse gases on the environment, benefitting society as a result.

A carbon tax is a price set per unit of carbon, or more commonly, per unit of carbon dioxide emitted — the unit used is a ton. This means it is paid for each ton of carbon dioxide emitted during the production and operational processes.

A carbon tax can be implemented in one of three ways:

• Downstream: if a carbon tax is levied downstream, the tax is targeted toward the emitter of CO₂. For example, users of petrol for their vehicles or natural gases in their homes.
• Midstream: a midstream tax targets the first purchaser of fossil fuel in a supply chain. For example, this would apply to a refinery purchasing crude oil, where the tax would be paid on the carbon content of the oil purchased.
• Upstream: a carbon tax levied upstream would apply to fossil fuels from the point at which they are extracted from the earth and introduced into the supply chain.

The simplest method is to levy the tax upstream, as this would affect the fewest companies and individuals.

No, a carbon tax is not the same as an emissions trading scheme (ETS), although they are both types of carbon pricing. A carbon tax directly puts a price on carbon by outlining a tax rate on CO₂ emissions, whereas an emissions trading scheme (ETS), also known as a cap-and-trade system, essentially puts a cap on the total amount of greenhouse gas allowed to be emitted by companies implicated in an emissions scheme. If any of these companies have a low emission output, they can sell their allowance to other companies that emit more. This creates supply and demand, which means an ETS can establish a market price for CO2 emissions. It also encourages emitters to reduce their carbon footprint to stay within their allocated carbon budget.

As previously mentioned, a carbon tax is designed to reduce polluters' environmental impact by discouraging fossil fuel use in favour of more sustainable and environmentally friendly alternatives. However, as with any tax implemented, there are both advantages and disadvantages, which we'll cover in this section.

Advantages of Carbon Tax

The benefits of introducing a carbon tax include:

• An increase in the price of fossil fuels will encourage companies to reduce their carbon emissions by implementing alternative, more environmentally friendly sources of energy, such as solar power
• Reducing the environmental costs incurred from carbon emissions
• Ensuring polluters take responsibility and pay for their carbon emissions
• Increased social efficiency
• Raises revenue that can be used to reduce the impact of carbon emissions on the environment

Disadvantages of Carbon Tax

It is clear there are plenty of benefits to implementing a carbon tax. However, there are a number of potential disadvantages that need to be considered:

• It can be difficult to measure the exact amount of carbon dioxide emitted by polluters, and therefore, it is also difficult to ascertain how much tax should be paid
• Companies may decide to move production to other countries that do not have such stringent carbon taxes, and therefore, the issue is not resolved
• Companies may try to avoid a carbon tax by secretly polluting
• Implementing a carbon tax may discourage economic growth and investment in business hubs such as London and Manchester

There are several ways in which the UK is encouraging emission reductions, including the introduction of a carbon price floor of £18 per ton of CO₂ — this resulted in carbon emissions falling to their lowest level since 1890. The UK has also taxed carbon by implementing duties on petrol and diesel.

Additionally, the UK participated in the EU Emissions Trading Scheme (ETS), the world's largest carbon market. However, after deciding to leave the European Union, the UK introduced its own ETS on 1 January 2021. The UK ETS applies to two energy-intensive sectors: aviation and power generation. It also applies to activities that result in greenhouse gasses, including the combustion of fuels in installations where the units have a total rated thermal input that exceeds 20MW. The scheme works on the 'cap and trade' principle, which means there is a cap on the amount of CO₂ that can be emitted by companies and individuals participating in the scheme. This cap is then reduced by 5% annually to help the UK reach its target of bringing carbon emissions to net zero by 2050.

To reach the net zero goal by 2050, more will need to be done to effectively reduce the amount of greenhouse gas released into the atmosphere. For this reason, the UK government has also drawn up carbon tax proposals to help reach this goal. According to the Zero Carbon Campaign, this carbon tax could raise £27bn a year by 2030 simply by altering existing levies on carbon-intensive sectors.

However, the UK's carbon tax is still being outlined and has yet to be confirmed. That said, UK residents have responded favourably to the suggestion. In a poll of 2,000 people carried out by Opinium for the Zero Carbon Campaign, two-thirds said that a tax on carbon was a fair way to raise funds to benefit the country. Of those polled, 68% did also say that they would like to see poorer individuals protected in the event of a carbon tax. This would mean that high emitters, such as companies and manufacturers, take responsibility for the negative impact on the planet rather than the public.

Understandably, global warming is a huge concern as we try to reverse the negative effects that increased CO₂ emissions have had on our planet. Even as individuals, we can still do our bit to help. Here are some small changes you can make that will reduce your carbon footprint:

Transport

• Use public transport or cycle to destinations
• Share journeys with others where possible — especially longer ones
• Take the train on longer journeys instead of flying

Food

• Buy local produce to cut down on transportation
• Choose fish from sustainable sources
• Buy what you need and can actually consume to cut back on waste
• Reuse shopping bags and opt for plastic-free ones where possible

Clothing

• Buy from environmentally-friendly and sustainable brands
• Make do and mend clothing, so you don't need to replace items so often
• Rent clothing for special occasions
• Buy from second-hand shops

Energy and waste

• Adjust heating — lowering it 1-degree Celcius will make a difference overall
• Take shorter showers, especially instead of baths
• Turn off taps when brushing your teeth and doing the dishes to save on water and energy
• Unplug and switch off devices when not using them (remember, also turn the plug socket off)
• Ensure waste is put in the correct bin for recycling
• Limit the amount of data stored in the cloud to reduce your digital footprint
• Choose products with an "A" energy rating

Reducing carbon emissions is crucial to protect the planet from the effects of global warming. To do this, many countries have introduced carbon pricing to deter the use of fossil fuels in energy-rich industries such as aviation and power generation. This can be done in several ways, with the most common being a cap and trade system (also known as an emissions trade scheme) and carbon tax.

The UK government has already introduced an ETS following its departure from the EU ETS in December 2020. The scheme, along with the proposal for a carbon tax, will help achieve the target of bringing carbon emissions to net zero by 2050.