What Is a Carbon Tax?
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What Is a Carbon Tax?

By Rachel Jaeger

Carbon taxes are taxes which set a price on each ton of carbon or other greenhouse gasses that they emit. The goal of a carbon tax is to motivate companies to reduce their carbon footprint. If they change the types of machines that they use, then they will use less carbon, which then leads to lower taxes.

Carbon emissions are rising. If they continue to do so, temperatures on earth will also continue to rise. Carbon, along with other greenhouse gasses like methane and nitrous oxide, traps heat inside the earth, which then maintains temperatures—when there is a normal amount of greenhouse gasses in the atmosphere. When there is too much, temperatures rise and global warming increases. The point of a carbon tax is to lower our carbon emissions to maintain global temperatures

How Does It Work?

Taxes like these are not uncommon. A carbon tax is what is known as a Pigouvian tax: “a tax that businesses or individuals must pay due to engaging in activities that cause adverse side effects for society.” Other examples of these include tobacco taxes or sugar taxes. The most widely discussed today, however, is the carbon tax.


Carbon taxes are usually taxed as far upstream as possible. Instead of taxing them after they are used, they are taxed as soon as the carbon is taken out of the ground or imported into the country. This means that the ones who actually pay the carbon tax are the fuel suppliers. They, in turn, pass on this carbon tax to their buyers by adjusting their prices to make it more expensive. The companies will often continue to pass it on by making their products more expensive for consumers as well. By taxing the carbon so far upstream, everyone who uses the product is ultimately taxed in some way.

Extra Tax Money

Since this is an additional tax, the government is making a lot of money from it. The question then remains: what must be done with the extra money? There are many ways that it could be used, and no completely correct answer. Some countries use this money to lower other taxes; some use it to reduce the federal deficit. It could also be “returned to taxpayers in the form of lump-sum rebates.”  Each has its own benefits and brings its own challenges.

Where Are Carbon Taxes Used?

United States

Obviously, not every country has carbon taxes—and this includes the United States. The United States is the world’s second largest carbon emitter, producing about 15% of the world’s carbon emissions. Carbon taxes are hotly debated within the U.S. government, with Democrats considering proposing a carbon tax for the 2023 budget. So far, these have come to nothing. This is most likely because the fossil fuel industry makes the government a lot of money, and because laws like these disproportionately affect people of low income—items made with carbon are simpler and easier to produce, which makes them cheaper.

However, many states—like California, Virginia, New York, and New Hampshire, to name a few—have passed their own carbon pricing laws. These laws enact carbon taxes within the states they are passed in, but not anywhere else in the United States. Many of these states are part of the Regional Greenhouse Gas Initiative, a program that “limits carbon dioxide emissions from the power sector.”  Other states, like Washington, are beginning to look into joining this program or creating their own as well.


There are currently 44 countries that have implemented a carbon tax, including Argentina, Canada, China, Japan, Singapore, and the entire European Union. Of these, the first to put a plan into effect was Finland in 1990. Currently, the most severe is Norway, at $69.00 per ton of carbon. There are also nine more countries that are thinking of implementing one in the near future: Brazil, Brunei, Indonesia, Pakistan, Russia, Serbia, Thailand, Turkey, and Vietnam. 

Benefits and Drawbacks


As said before, carbon taxes are one of the main ways for countries to control carbon emissions. They are fairly easy to implement, and they bring revenue into the government which can be used for other projects. It encourages major companies and individuals to take a step back and look at their carbon footprint, to see how their actions impact the environment. Ultimately, carbon taxes are able to significantly lower carbon emissions and reduce global warming.


While carbon taxes do lower carbon emissions, they aren’t perfect. One problem with them is that they are regressive, meaning that they disproportionately affect people with low income. Since a larger percent of their income is spent on energy and things that use carbon, a larger percent of their income is taxed. It is very difficult to figure out who is hurt by this and compensate them for it.

Another issue is that a tax like this can disrupt the flow of goods. As businesses attempt to lower their carbon emissions, they focus less on their goods output and creating jobs. Thus, the flow of goods decreases for a short time and fewer jobs are available.


Though carbon taxes are some of the most used programs, there are a few other alternatives that many countries use that are similar to a tax on carbon.

Cap and Trade

Cap and trade is another useful tool to limit carbon emissions. Rather than placing a tax on carbon, it places a limit on the amount of carbon that can be emitted. Under this law, the government gives each company a specific allotted amount of carbon they can emit, placing a “cap” on carbon emissions. The “trade” aspect comes into play afterwards, as “companies that can reduce their emissions at a lower price could sell their excess allowances to those facing higher costs.”

A carbon tax is often more beneficial than cap and trade as it places a tax on everyone, whereas the government only caps the larger companies. However, cap and trade is easier to track, as there is a specific limit to carbon. This lets the government measure global temperature decline, and it incentivizes companies to lower their carbon output so they can sell their allotment to other people.

Carbon Offsets

Carbon offsets are a way for companies to avoid paying a carbon tax or for the government to reduce carbon emissions without taxing their constituents. Instead of paying a tax, these companies will fund “environmental projects that reduce carbon emissions elsewhere to compensate” for any carbon they emit. By giving money to these organizations, they “offset” the carbon that they emit, since these companies work to remove the carbon from the atmosphere.

The Takeaway

Though carbon taxes cannot fix everything, they are a wonderful way for the government to regulate greenhouse gas emission and return the environment to the way it is meant to be. The earth’s temperature is rising, and we all must do our best to lower our carbon emissions so the temperature can return to normal.

There are also ways for you to help reduce your carbon footprint, even without a carbon tax! Simple things like driving less and carpooling more, composting, and turning off lights when they’re not being used will all reduce your carbon footprint. You can also contribute to organizations like Pull to Refresh, which work to go beyond carbon zero. Join us today in removing your carbon footprint so we can all build a better future!

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