Part 3. CARBON PRICING: Carbon Pricing Vs Carbon Tax
Environmental-related tax policy requires that firms, whose economic activities have shifted costs onto society, should pay for the damages they cause. Pollution taxes have been part of mechanism for internalising the social costs of environmental damages. Related to greenhouse gases (GHGs), a tax should penalise GHG emitters and motivates them to reduce GHG intensity of energy consumption or to use environmental resources more efficiently. So carbon taxes ensure big polluters pay for the external costs they inflict on the wider society.
Yet such taxes have often proven politically controversial and hard to implement. In the area of public policy on climate change, this has led to a preference. This has also led to the language of the market being used inappropriately as a rhetorical device. Rather than the term ‘tax’, a neoliberally more acceptable term ‘price’ is increasingly employed, as if the idea were to establish a market rather than a government regulated charge.
Actually, carbon tax is a type of carbon pricing, while the other primary type of carbon pricing is emissions trading systems or ETS. A carbon tax sets an exact price on carbon by specifying a tax rate on GHG emissions or on the carbon amount found in fossil fuels. Carbon tax differs from an ETS in that the GHG emissions reduction outcome of a carbon tax is not defined in advance, but the carbon price is.
Another indirect way of pricing carbon is fuel taxes, regulations that take into account the social cost of carbon, and the elimination of fossil fuel subsidies. GHG emissions may also be priced through payments for carbon emission reductions.
References:
- ESEngineeredsystems. 2021. Carbon Pricing vs. Carbon Tax: Understanding the Difference https://www.esmagazine.com/articles/101384-carbon-pricing-vs-carbon-tax-understanding-the-difference
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