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Insights into Editorial: Putting a global price on carbon


Insights into Editorial: Putting a global price on carbon



carbon tax



The public’s recognition of global warming has driven lawmakers around the world to negotiate greenhouse-gas reductions. Among the suggestions, carbon tax is more popular.


Why climate change is a cause of concern?

There is compelling evidence that climate change is the greatest and widest-ranging market failure ever seen, and there is a large chance of a global average temperature rise exceeding 2ºC by the end of this century.

  • It has also been established in various scientific studies that any such warming of the planet will lead to increased natural calamities such as floods and cyclones, declined crop yields and ecological degradation.
  • A large increase in global temperatures correlates with an average 5% loss in global GDP, with poor countries suffering costs in excess of 10% of GDP.


What is carbon tax?

Carbon tax is a form of pollution tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas or oil. Because the tax makes using dirty fuels more­ expensive, it encourages utilities, businesses and individuals to reduce consumption and increase energy efficiency. Carbon tax also makes alternative energy more cost-competitive with cheaper, polluting fuels like coal, natural gas and oil.

Carbon tax is based on the economic principle of negative externalities. Externalities are costs or benefits generated by the production of goods and services. Negative externalities are costs that are not paid for. When utilities, businesses or homeowners consume fossil fuels, they create pollution that has a societal cost; everyone suffers from the effects of pollution. Proponents of a carbon tax believe that the price of fossil fuels should account for these societal costs. More simply put — if you’re polluting to everyone else’s detriment, you should have to pay for it.


Why a Carbon Tax?

Carbon is currently not accounted for as a cost in production. This means that industry actors do not need to actively monitor and limit their CO2 output. Governments, businesses and consumers all emit carbon dioxide and other greenhouse gases by burning fossil fuels. When greenhouse gases are burned they release CO2 that remains resident in the Earth’s atmosphere, trapping heat and warming the globe. The build up of these emissions can have devastating environmental consequences for the climate and ecosystems.


Rationale behind the imposition of carbon tax?

By placing a price on carbon, consumers and producers are encouraged to reduce their carbon dioxide emissions through ‘substitution and innovation’. According to the World Bank, a carbon tax “sends a price signal that gradually causes a market response across an entire economy, creating incentives for emitters to shift to less greenhouse-gas intensive ways of production and ultimately resulting in reduced emissions.

When actors encounter carbon-based taxation they are inclined to “reduce carbon use or energy efficiency, switch to lower-energy strategies, innovate, or offset.” This has an effect on both production and consumption, effecting variables from the location of a business and the materials it uses to an individual’s choice of vehicles or appliances. Industries and consumers respond to price changes. By pricing carbon, governments encourage businesses and households to seek out low-carbon options and adopt more energy efficient sources in the long-term.


What is to be ensured?

Carbon tax regimes will only be effective if harmonised internationally. Different country-wise policies could lead to ‘carbon leakages’ where energy-intensive businesses will most likely move to less strict national regimes. Harmonised carbon taxes hold advantages over quantitative limits imposed through government control and regulation.


Advantages of harmonised carbon taxes:

  • A carbon tax regime avoids the problems related to choosing a baseline. In a price approach, the natural baseline is a zero carbon tax.
  • A carbon tax policy will be better able to adapt to the element of uncertainty which pervades the science of climate change.
  • A carbon tax policy is likely to cause less volatility in the prices of carbon emissions.
  • Quantity limiting policies are often accompanied by administrative arbitrariness and corruption through rent-seeking. This sends off negative signals to investors. In a price-based carbon tax, the investor has an assured long-term regulation to adapt to and can weigh in the costs involved.
  • The price-based approach in the form of carbon taxes makes it easier to implement equity-based international adjustments than the quantity-based approach.
  • The carbon tax will essentially be a Pigovian Tax which balances the marginal social costs and benefits of additional emissions, thereby internalising the costs of environmental damage. It can act as an incentive for consumers and producers to shift to more energy-efficient sources and products.


Way ahead for India:

Actually, India has a carbon tax of sorts. It is not called as such but the United Progressive Alliance government’s budget of 2010-11 introduced a cess of Rs. 50 per tonne of both domestically produced and imported coal. Last year, this was doubled. However, the idea of this cess, it must be admitted, was less to curb carbon emissions but more to raise revenues for the National Clean Energy Fund.

But the important point is that India already has an important half-step, even though its version of a carbon tax is not economy-wide and it is far below the levels that are generally accepted as being desirable (around $20-25 per tonne of carbon).



A global and immediate policy response is urgently required to reduce greenhouse gas emissions and mitigate the effects of climate change. A carbon tax policy might not seem a magic wand, but it is also less likely to face political opposition and compromise while creating new sectors for businesses and growth.