Definition of Carbon Tax

What Is Carbon Tax?

A carbon tax is an environmental tax applied to the burning of fossil fuels in order to discourage the production of greenhouse gas emissions such as carbon dioxide. Normally this is conceived as a levy on the production of fuels such as natural gas, coal, and petroleum, thus encouraging non-carbon fuels and technologies to emerge in the market and better compete against large carbon emitting corporations.

A carbon tax has been proposed as an alternative to a cap and trade carbon reduction system. In a cap and trade program, carbon dioxide emissions and other greenhouse gases are limited. Those entities producing more greenhouse gas emissions than they are allotted are therefore forced to buy carbon credits from entities that are producing fewer emissions than they are allotted. The price for the carbon credits is determined by what the marketplace allows.

By contrast, the price of a carbon tax is determined by political and legal structures. Those producing greenhouse gas emissions are therefore free to produce as much as they wish, but must pay a tax for whatever quantity they emit. This system makes the production of clean, renewable energies such as wind, solar, and geothermal more cost competitive, having the effect of boosting revenues in those industries and limiting them for dirty energies.

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