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The Curious Case of the Carbon Tax

Burning fossil fuels is relatively cheap until you factor in respiratory disease, floods, lower farm output, and many other effects from the resulting greenhouse gases. That’s why advocates say putting a price on how much carbon dioxide goes into the air is key to climate change action.

Worldwide, making it most costly to pollute could help governments achieve the climate goals they agreed to pursue at the landmark talks last year in Paris. Yet the words “carbon tax,” or the related “cap and trade,” can be politically charged. U.S. President Barack Obama proposed in early 2016 a $10 per barrel fee on oil, which received blistering criticism from Republicans, who called it “dead on arrival” and a “horrible idea.”

A carbon tax would raise the price of fossil fuels, with more taxes collected on fuels that generate more emissions, like coal. This tax would reduce demand for high-carbon emission fuels and increase demand for lower-emission fuels like natural gas. Renewable sources like solar, wind, nuclear and hydroelectric would face lower taxes or no taxes. To be effective, the tax should also be applied to imported goods from countries that do not assess a similar levy on the use of fossil fuels.

Places where it already Works

Many countries already have some version of carbon taxes. In the United States, for example, federal and state taxes on gasoline and diesel, which are used to pay for road and transit projects, are effectively carbon taxes.

In Denmark, which has had a carbon tax since 1992, emissions per person went down 15 percent between 1990 and 2005, according a report from the U.S. National Renewable Energy Lab, while Sweden’s government estimates that its emissions by 2000 would have been higher by at least 20 percent had it not implemented a tax in 1991. Overall, Sweden’s carbon emissions went down by a fifth between 1990 and 2012, while Denmark’s fell almost 25 percent. On the other hand, Norway actually saw emissions go up after its carbon tax was enacted in 1991, as its oil- and gas-driven economy grew. “Oil and gas production has been the main cause of the increase in Norway’s carbon dioxide emissions,” says the Norwegian Environment Agency, even as it calls the carbon tax its “main instrument in environmental policy.”

But the concept has support in seemingly unlikely corners. In 2015, six European oil and gas companies called for governments to set a carbon price as part of international climate negotiations, saying it would provide a “clear roadmap for future investment.”

These companies — the BG Group, BP, Eni, Royal Dutch Shell, Statoil and Total — are not taking a bold environmental stand. They are being pragmatic. They want an efficient and predictable policy to limit greenhouse gas emissions because they realize something must be done.

How to Price Carbon

What exactly should that price be? There’s the tricky part: Existing prices around the world range from $2 to $168 per metric ton emitted.

A carbon price can take shape in different ways. A tax like Obama’s $10-per-oil-barrel proposal can provide certainty about costs for businesses; an emissions trading system, or cap-and-trade, on the other hand, sets a limit on the overall greenhouse gas amounts and lets polluters trade credits to stay under the ceiling. Either concept can be effective, says environmental research group World Resources Institute: “Critics focus on certain disadvantages of carbon taxes or cap-and-trade, but their arguments are unpersuasive if policies are well designed.”

Opponents of a price on carbon argue that it will hike people’s bills. Of course, the point is to make fossil fuels more expensive, and therefore less appealing, for everyone to use—it’s the same strategy that has long been used with cigarettes and alcohol by a number of countries. So, it’s an idea many of us can get behind in theory, but it sometimes sours when you’re actually facing higher prices at the pump.


Revenue generated by carbon taxes could be used for a variety of purposes. A lot of the money should surely be given to households, especially the poorest, through tax credits or direct payments to offset the higher prices they would have to pay for gasoline, electricity and other goods and services because of the tax. Some of the money could be used to invest in renewable energy and public transportation, or to lower other taxes.


The global climate change crisis will not be resolved simply by implementing a carbon tax or a cap and trade system-or by any other legislative approach. Fundamental changes in energy production, development, and conservation, as well as changes in transportation, land use, and natural resource policies, must be pursued alongside efforts to reduce carbon dioxide emissions.

A better response to global climate change would be a carbon tax that is adjusted over time to achieve the necessary reductions in carbon dioxide emissions, as well as the corresponding improvements in alternative energy sources and land and resource management practices that are essential to conserving our planet for future generations.