Decoding carbon tax

Highlights

• To restrict the dependency on fossil fuels, various governments across the globe have started to put carbon tax.
• Presently, around 27 countries have implemented a carbon tax.
• A carbon tax can turn out to be a bane rather than a boon if not implemented properly.

The Paris agreement was signed in 2015 in order to keep global warming within 1.5 degrees Celcius. However, according to the recent IPCC report, we will soon cross the global warming limit by 2040, if corrective measures are not put to place. Thus, to curb greenhouse emissions, countries employ various policies to transform their economies from fossil fuel-based economies into green energy-based economies. In order to bring about a successful transition, several countries have adopted a “carbon tax”.

Let’s understand the carbon tax, which few countries have implemented and look at the real-life pros and cons of this new policy. Everything in depth!

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Introduction to carbon tax

Most production, transportation, and other activities are currently based on fossil fuels. Lumpsum amounts of carbon dioxide and other greenhouse gases are emitted, which cause global warming. Thus, to restrict the dependency on fossil fuels, various governments across the globe have started to put a carbon tax.

The tax is implied on industries based upon their per tonne of carbon emissions. The primary motive is to encourage civilians to transition into green-energy-based production and transportation. Thus, at last, the prices of carbon-emitting goods will rise, so the demand for the same will fall down the line.

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What Is Carbon Tax and Why Have Several Countries Implemented This?

Countries that have implemented carbon tax

Presently, around 27 countries have implemented a carbon tax. Some of them are Argentina, China, Chile, Canada, the UK, Ukraine, Norway, Singapore, New Zealand, South Africa, Sweden and Mexico. A few others are considering implementing a carbon tax; these countries are Brazil, Russia, Indonesia, to name a few.

Source: © Chuongy | Megapixl.com

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Is carbon tax a boon or a bane?

It may seem like carbon tax must be all good! But there are significant cons of the same that are needed to be addressed first. The carbon tax isn’t universally implemented yet; let’s understand why.

Firstly, the blanket implementation of the carbon tax may hurt the poorer section of society. Even if the tax is progressive, the poor will still suffer the welfare loss as commodities will become expensive, thus shrinking their consumer baskets.

Secondly, even if the governments implement a carbon tax, they will need to levy high taxes to curb the emissions to the extent that is needed to keep global warming within limits. And employing a carbon tax may not be feasible for several governments due to political and business reasons.

Thirdly, if the tax is implemented, the market would come into the transition period and if other social-welfare policies are not implemented to neutralise the effect then several people, capital and other resources would remain unemployed, thus, causing more disruption.

Consequently, the demand for the renewable sector may rise. However, the disinvestment in the fossil fuel industry might not take place immediately. Thus, causing a mismatch in demand supply. The mismatch and other disruptions will be in the short run for sure, but the magnitude of these disruptions will lay the future of the economy.

Fourthly, the carbon tax is not targeted at emissions like methane. Thus, making the tax a one-dimensional concept. Additionally, it is hard to measure carbon emissions from deforestation, waste management, etc.

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Bottom line

Conclusively, a carbon tax can turn out to be a bane rather than a boon if not implemented properly. Thus, countries need to see the progressiveness of the tax by first implementing it on luxurious goods and finding other non-taxable ways for curbing carbon emissions from waste management and deforestation. Additionally, equivalent awareness needs to be spread across so that businesses and civilians are all prepared.