Carbon Tax

A carbon tax is a policy instrument that may be used to decrease greenhouse gas emissions. It works as a direct charge imposed on the carbon dioxide (CO2) emissions associated with the use of carbon-based fuels. Though some distinguish between a tax on the carbon content of fuels (a carbon tax) and a tax on emissions of CO2 from the burning of different fuels (a CO2 tax), most use the terms interchangeably. Carbon taxes are known as a price-based instrument in the sense that a common price per unit of CO2 (or carbon content) is fixed, allowing the quantity of emissions to adjust according to whether individual emitters find it cheaper to change their emissiongenerating behavior, or pay the tax.

In contrast, emissions trading is known as a quantity-based instrument, in the sense that the quantity of emissions is capped at some level by government (or some central authority), allowing the price of emissions to fluctuate according to the individual buying and selling of emissions credits in the carbon market. In theory, a carbon tax should apply economy-wide and to all energy sources, affecting the price of each in proportion to its global warming potential, usually measured in terms of CO2 emissions, or the CO2 equivalent (CO2e) released when it is combusted. Accordingly, under a properly designed carbon tax, coal is more heavily penalized than, for instance, natural gas, because of its higher carbon content and associated emissions (about 25 grams of carbon per 1,000 Btu of burned coal to about 14.5 grams of carbon per 1,000 Btu from natural gas). To convert from carbon to CO2 (and vice versa), one can simply multiply (or divide) by the carbon to CO2 ratio (12/44).