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Research Paper: Carbon Tax Policy


Carbon tax policy is one of the environmental policies that have extensively embraced by many countries across the world. Carbon tax was first established in Finland in the year 2011, before being adopted in other countries including the US, UK, Australia, China and other countries in Europe and across the world.  According to Mathur & Morris (2014), carbon tax was reached with the aim of ensuring that laws on environment did not affect the operations of the economy. In most of the argument about the climate changes and related measures, the focus has been on how the measures impact the economy. In countries such as China, the argument against imposing strict environmental measures has been based on the impact the measures have on the economy. The introduction of pricing of carbon dioxide or putting a price on environmental pollution has been embraced because it does not impede economic production and development but rather promote accountability of the persons and organizations involved (Hassett, Mathur & Metcalf, 2007). Although carbon dioxide is just one of the greenhouse gases, it was decided upon because it makes the highest percentage. According to EPA (2017), transportation industry contributes 27% carbon dioxide emissions27% and industries 21%, Electricity 29% and other human activities. The carbon tax is one of the pollution taxes that were established as a strategy to address the issue of emissions of carbon dioxide. Through a calculation process, the carbon tax ensures that companies pay the price for the level of emissions to compensate for the negative externality.

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This paper analyzes the carbon tax environmental policy, its objectives and alternative policies that can be used to achieve similar objectives.

History of the Policy

Although governments and international organizations such as the UN have been candid on the issue of global warming and climate change, the implementation of an effective solution has been a challenge due to the cost and other areas of disagreements that comes with it. Addressing the issues of greenhouse emissions are affected by lack of a fair transition to low-carbon emissions without affecting the level of production in the economy (Zhao, 2011). There was a need for looking a right strategy through which carbon emission would be reduced without forcing organizations to lower the level of production to a given level. This is the main reason behind the establishment of the carbon tax because it ensures that organizations are able to produce and pay for the social cost (EPA, 2017). The carbon tax also comes with a motivation of for industries to reduce their level of emission and does not dictate on the amount of production, the level of emissions or the kind of technology to be applied during the production process.

Carbon dioxide is produced during various human economic activities including far mining, energy production, clearing land among other economic activities. When the gas accumulates in the sky, it leads to greenhouse effect because of the heat trapped in the earth’s atmosphere leading to other climatic changes. This poses a threat to socio-economic development, affects biodiversity and posing a great threat to humanity. Control of carbon dioxide has constantly been faced with a myriad of challenges because of the varying ideologies and opinions.

Establishment of Carbon tax

The carbon tax was proposed by the Lawrence Summers, and George Shultz as the inevitable climate solution and a strategy for lowering carbon emissions into the atmosphere (Shultz & Summers, 2017). Since the policy was established, the many countries such as Australia, Denmark, and Norway have experienced a tremendous reduction in the rate of carbon emissions (Zhao, 2011).  Although the carbon tax has proven to be an effective, fair and market-based strategy for reducing the rate of emissions of carbon dioxide, it comes with various challenges. Firstly, there is a problem of monitoring the number of emissions contributed in a given method of production. Given the fact that there are different greenhouse gases and multiple ways in which the gases are produced makes it difficult to accurately determine the level of emissions (Shultz & Summers 2017). Additionally, the carbon tax policy is not on the point of capturing carbon emission before being released to the atmosphere.

Because much carbon dioxide is emitted during the combustion of coal and natural gas and oil, the emitters will be required to install equipment to help in monitoring the level emissions. The decision to focus on taxing carbon dioxide is based on the fact that it is the most prevalent greenhouse gas. In the U.S, carbon dioxide makes approximately 83% of the total level of greenhouse gases emissions (EPA, 2017).

Different ideologies have been hindering the establishment of effective counter emissions policies. Some of the biggest emitters such as the US and China have been the most criticized for failing to lead by example in the war on climate change (Christoff, 2010). Unlike the U.S whose emissions are based on luxury production, China argument on failing to embrace some emissions regulation is because of its high relies on production and economic growth. In this respect, the establishment of a carbon tax is relatively fair because it promotes responsibility of corporations on dealing with emissions (Shultz & Summers, 2017). Additionally, having a standard method of calculating the level of emissions creates a level playground for companies across the world.

Policy Analysis

             According to the policy, corporations are charged a dollar for every ton of carbon emissions they produce. The carbon tax policy aims at ensuring that the organizations are dedicated to lowering their level of carbon dioxide emissions by embracing new technologies. The increase in carbon dioxide in the atmosphere leads to the trapping of more heat leading to global warming and other negative externalities.  Because much of the carbon dioxide is emitted in the transports and other industries, levying taxes on carbon content is an effective method to encourage the reduction of emission in every level of production.

The objective of the carbon tax, according to Brown (2017), is to compensate for the harm that is caused by the accumulation of carbon into the universe. By significantly controlling the rate of emissions, the collection of carbon in the atmosphere will help to counter the climate change. Apart from reducing the rate emissions of carbon dioxide, the carbon tax is a compensation strategy for the havoc that is caused by the high rate of emissions. Additionally, according to Carmody (2011), the revenue collected from the carbon tax can be used in improving the environment as well as funding the research on new technology for low emissions.

Although pricing of greenhouse emission is intended to reduce the rate of emissions, Carmody (2011) explains that some experts see it as a counter strategy. The argument is based on the fact that taxing carbon will lead to the increase in the cost of production which will intern lead to rising prices, therefore, affecting the level of production and consumption. It is also criticized as way used by the government to increase the amount of revenue collected by the government. In this respect, the carbon tax stands out as another method for increasing government revenue rather than purely a climate policy.

Like most policies, the carbon tax is expected to benefits some parties and disadvantages others. Firstly, the carbon tax is not instantaneously efficient but takes a considerable amount of time for the results to start showing. Countries that have already established the policy have reported a significant reduction in their amount of emissions over a period of 10-20 years. This is socially important because with the reduction in the level of emissions comes with a positive impact on the climate other environmental benefits (Mathur & Morris, 2014). The implementation of the carbon tax policy comes with both benefits and disadvantages to different parties.

According to Mathur & Morris (2014), the amount of carbon tax is charged on every level of production where carbon dioxide gas is emitted. The cost can also be passed to the last party on the chain which is the retailer in this case. In this regard, the carbon tax is an extra burden to the corporate world because of the increase in the cost of production. The carbon tax is the amount paid by the companies from every ton of carbon dioxide emitted. This means energy companies and other companies that heavily rely on carbon products are more likely to be affected as compared to companies that only use a small portion of carbon products (Mathur & Morris, 2014). With the increase in the cost of production, companies are likely to lower the level of production as they sort for alternative methods of production with a low level of emissions of carbon dioxide.  However, a rebate on tax will be encouraged for companies that will establish measures to prevent carbon dioxide from reaching the atmosphere such as carbon dioxide capture.

In addition, the policy is likely to be politically charged because of the flexibility it offers the policymakers. When making decisions about the policy, the policymakers are likely to be influenced by lobby groups to reduce the corporate tax. Alternatively, the policymakers are likely to divert the money to other capital projects rather than putting the money on environmental projects.

Analysis of Policy Alternatives

            The cap-and-trade program is an alternative policy that is used to address the issue of emissions of industries. Unlike the carbon tax, the cap-and-trade program, according to Kaufman (2016), establishes an amount of emissions ‘allowances’ per year. The allowances are used to price the carbon emissions through bidding and secondary markets. One of the similarities between the two methods is that they both motivate organizations to focus on cutting their emissions to their lowest level. They encourage investors to embrace technologies that favor low level of carbon emissions because of the low amount of cost that comes with it. Another similarity between the two policies is that apart from promoting the reduction of carbon dioxide, they lead to the generation of revenue to the government. According to Kaufman (2017), the emissions of carbon are likely to continue reducing even during economic downturn. The carbon pricing policy is an effective strategy for ensuring that corporations are committed to lowering their level of emissions.

The command-and-control is one of the policy strategies that have for years been used to in dealing with the problem of emissions. The strategy involves deciding on the amount of emission, the level of production and kind of technologies to apply in dealing with the problem (Bergquist et al., 2013). Although this method came with a considerable impact, it hindered level of production in addition to preventing organizations from effectively competing with other players in the industry. For instance, regulation of emissions was strict on U.S corporations as compared to those of China, therefore hindering balanced competition (Bergquist et al., 2013).  On the other hand, with a standard formula for calculating carbon tax, corporations are given an equal platform for competition.

Tradable permits system is an alternative strategy for countering the rate of emissions for carbon dioxide and adopted in 2003 (Wissel & Wätzold, 2010). The system involves limiting the amount of carbon gas released by the dictating on the maximum permissible rate of emission. More permits can be traded to firms that want to increase their economic activities. In the U.S, the system is used to limit the emission of carbon dioxide and nitrous oxide. The system works in a way that allows one company that produces more emissions to compensate a company that produces a low rate of emissions. EPA uses the sealed bid auction strategy in implementing the traded permit system (Wissel & Wätzold, 2010). The system is effective because it involves rational planning and evaluation of the emitters for maximum effectiveness. Before the permits are awarded, the company is first evaluated to examine its historical level of emission to decide the level of emissions. The permit to pollute is given to the highest bidder when there is no single company owning the right to pollute the air. Although this approach is effective, it is criticized for promoting a high level of emission as compared to a carbon tax. Unlike the carbon tax, the permits given to the organizations allow them to maintain their level of production which only leads to the increase in emissions (EPA, 2017). Additionally, the tradable permit is different from the carbon tax is different in the sense that it does not give incentive for firms to invest in more environmentally friendly technology.


The carbon tax is one of the best environmental policies that have continued to be embraced by many countries across the world. The implementation of the carbon tax was based on the argument that an effective emissions policy should not negatively impact the economy. In this regard, the establishment of the carbon tax is a fair balance between economic production and control on the rate emissions. Equipment is placed to examine the amount emitted and calculate the amount to be paid as a compensation for pollution. The carbon tax is effective because it promotes a low level of emission, it is a means for collecting revenue to counter emissions in addition to motivating the research and development of new low emissions technology. Alternative policies such as cap-and-trade, command-control regulation, and tradable permits were surpassed by carbon tax because they lack effective strategy of countering pollution in the long-term.


Bergquist, A. K., Söderholm, K., Kinneryd, H., Lindmark, M., & Söderholm, P. (2013). Command-and-control revisited: Environmental compliance and technological change in Swedish industry 1970–1990. Ecological Economics85, 6-19.

Brown, M. (2017). In Support of Carbon Tax. Washington Post. Retrieved January 26, 2018, from https://www.washingtonpost.com/opinions/in-support-of-a-carbon-tax/2017/06/25/94f99038-577c-11e7-840b-512026319da7_story.html?utm_term=.244c021f6786

Christoff, P. (2010). Cold climate in Copenhagen: China and the United States at COP15. Environmental Politics19(4), 637-656.

EPA (2017). Sources of Greenhouse Gas Emissions. EPA. Retrieved January 25, 2018, from https://www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions

Hassett, K. A., Mathur, A., & Metcalf, G. E. (2007). The incidence of a US carbon tax: A lifetime and regional analysis(No. w13554). National Bureau of Economic Research. Retrieved January 25, 2018, from https://www.eenews.net/assets/2017/04/12/document_cw_01.pdf

Kaufman, N. (2016). Carbon Tax vs. Cap-and-Trade: What’s Better Policy to Cut Emissions?. World Resources Institute. Retrieved January 25, 2018, from http://www.wri.org/blog/2016/03/carbon-tax-vs-cap-and-trade-what%E2%80%99s-better-policy-cut-emissions

Mathur, A., & Morris, A. C. (2014). Distributional effects of a carbon tax in broader US fiscal reform. Energy Policy66, 326-334.

Shultz & Summers (2017), This is the One Climate Solution that’s Best for Environment- and for business. Washington Post. Retrieved January 26, 2018, from https://www.washingtonpost.com/opinions/this-is-the-one-climate-solution-thats-best-for-the-environment–and-for-business/2017/06/19/9736b72c-542f-11e7-a204-ad706461fa4f_story.html?utm_term=.52e95a52c49c

Wissel, S., & Wätzold, F. (2010). A conceptual analysis of the application of tradable permits to biodiversity conservation.Conservation Biology24(2), 404-411.

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