Running Head: ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION

Are Carbon Taxes an Economically and Environmentally

Viable Way of Reducing Carbon Emissions?

Jeffrey R. Peart
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 2

Abstract

The implementation of carbon taxes has been reviewed and considered for decades,

the first implemented policy being in Finland in 1990. Carbon taxes have been

considered by economists as one of the most effective possible ways to reduce our

carbon footprint. There have been numerous papers detailing predictions of carbon

pricing by way of various models, the most prominent type of model being the

computable general equilibrium or CGE model. Most of these models have shown that a

policy, if implemented and structured correctly, can be an effective way of reducing our

emissions while also reducing our carbon footprint. There have not been many policies

that have been successfully applied so far in the world of carbon taxes, but in the few

countries where policies have been set forth we can study them and learn from their

successes and their failures. Great Britain’s policy set forth in 2008 is regarded as the

most successful carbon tax program in existence today. They have a revenue neutral

system meaning all profits from the tax go back to the public, and they have also cut

down their emissions by as much as 15% (Murray, B., Rivers, N. 2015). While Great

Britain has been successful, other countries have tried and failed, such as Australia.

They had little public support and a program that was less than efficient. Through my

research I have concluded that a carbon tax program can be effective if the policy is

tailored to the specific country, taking special care when deciding on the industries

included, public support, tax profit allocation and the varying effects of the tax in

different regions of the country.

Are Carbon Taxes an Economically and Environmentally Viable Way of Reducing

Carbon Emissions?

Introduction

Carbon emissions and ways to mitigate them have long been a controversial

topic throughout the world. There have been many studies and most scientists are in

agreement that human induced climate change is real and will produce numerous

problems for us in the future if we fail to act accordingly. According to one article

published in the National Academy of Sciences titled “Irreversible Climate Change Due

to Carbon Emissions” the effects of climate change are irreversible for at least 1000

years after emissions stop. This means that even if we stopped carbon emissions

completely we would not see a decrease in major storms, sea level rise, precipitation

rate or global temperature. Instead these factors will remain at the levels that they are

for at the least the millennium. This means that it is more important than ever to find an

effective means of mitigating carbon emissions and cleaning up our atmosphere. This

year in 2017 we experienced a single hurricane season that produced five category 4 or

higher hurricanes, an unprecedented and never before seen event. We are also

experiencing global temperatures that have been the hottest on record. In fact, 16 of the

17 warmest years on record have occurred since 2001, if you compare a graph of global

temperature with a graph of global carbon levels you can see the strong correlation

between them (Nasa, 2017).

There have been many solutions offered up, but one that is gaining traction and

currently being implemented throughout the world today is the carbon tax or carbon

pricing scheme. Most proposed carbon price policies are built around a cap and trade
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 4

system. Under this type of system carbon permits are distributed to producers and then

these permits are then sold among them, thus creating a market for carbon. The idea

behind this is that once a market is established, the market will balance out at the

efficient amount of carbon by way of market forces. There has been much research into

the topic and there are, like any solution, both pros and cons. The carbon tax is one

method that has been championed by environmental economists as one of the best

possible ways to curb climate change. Most studies suggest that a carbon tax will have

slightly negative effects on the economy but also have considerably substantial effects

on the reduction of carbon emissions. Whether the reduction in economic activity is

worth the reduced carbon emissions is an increasingly debated topic. Although, if we do

nothing about our emissions so that we do not hurt our economy, we will soon see the

effects of being nearsighted. The need for reduced carbon emissions is growing rapidly

and something must be done in the near future if we are to have any chance of

mitigating the effects of climate change. The future of our planet depends on us finding

a way to decelerate the process of global warming and carbon pricing schemes may be

one of our best options.

Pre-Implemented Carbon Tax Predictions

The idea of a carbon tax has been around for decades and there have been

many predictions using various models, most notably, CGE models, or computable

general equilibrium models. These models use economic data to predict a given policies

effect on the economy. Most of the studies that I have come across have been CGE

models. These papers generally state that although carbon emissions would be reduced
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 5

significantly, there would also be economic loss. The significance of the economic loss

varies depending on which study and also the country where the tax is being applied.

Most studies that I have looked at lean towards the opinion the emission reductions are

worth the economic loss, because in most cases, this loss is minimal and the emission

reduction is substantial.

The structure of the policy is a very important factor in whether or not the tax will

lead to heavy economic loss or minimal loss. In one study, “The Environmental and

Economic Impact of the Carbon Tax in Australia”, they had one scenario in which the

public was compensated with part of the profits from the tax and one with a tax only.

They showed that at a price of $23 per ton of carbon the carbon emissions would be cut

by 12% of current levels while taking on a loss in GDP of 0.59% without compensation

and 0.48% with compensation (Meng, S., Siriwardana, M., & Mcneill, J. 2013). This

shows that with the correct format of the tax loss in GDP can be minimized. Other

policies do not include a compensation policy and thus their loss in GDP is greater such

as in a study done in Chile where the model predicted a 2% loss in GDP for a $26 tax

(Benavente, J. 2016). This 1.5% increase in GDP loss could be due to a number of

factors, but one obvious symptom is the absence of compensation of the public from the

tax’s profits. Yet another study investigated the correlation of carbon taxes and

electricity prices. In Robson’s scenario they found that a carbon tax would increase by

19% (Robson, A. 2014), which is a very substantial increase and shows the need for

some sort of compensation plan for the public. For a successful implementation of a

carbon tax, compensation will most likely be a requirement, as the public will not be on
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 6

board if they are paying higher prices for necessities such as electricity as well as

experiencing loss in GDP and not receiving some amount of the money from the tax.

Another important variable in the carbon tax equation is the industries and

sectors that are subject to the tax. Studies and policies differ on which industries are

taxed as well as if households and transportation are taxed. These are very important

factors and lead to very different outcomes in the carbon tax scenario. It has been found

that it is more effective to tax only the producers in an economy as opposed to both

producers and households. This is because it was found to have less of an effect on

GDP (2% decrease) to tax only the producers than to tax households and producers

(2.3% decrease) (Benavente, J. 2016). The tax in the Australian study in the previous

paragraph did not include agriculture, which is one of the largest emitters of carbon; this

may be a contributing factor to why the GDP loss in that study is very low. In general,

for a carbon tax to be effective it must tax the appropriate sectors of the economy and

balance the costs and benefits of taxing large producers of carbon as a correlation can

be seen in the amount of carbon emitted by a producer and the corresponding effect on

the economy.

A study from China looked at the effects of a carbon tax on the different

provinces in the country. This study titled “Exploring the Impact of Carbon Tax on

China’s CO2 Reductions and Provincial Disparities”, examines the carbon tax effects on

areas of varying economic wellbeing. They found that although absolute GDP loss is

greater in the more developed eastern provinces, the wellbeing and living standard of

the western less developed provinces would be more effected. The solution that they

came up with to this problem was to distribute more money from the tax profits to the
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 7

provinces that were suffering the most welfare losses which mitigates the negative

effects. This needs to be taken into account when creating a carbon tax policy, because

although the cost of the tax may be uniform throughout the country the effects on the

wellbeing may be more drastic in some areas.

Results of Implemented Carbon Tax Policies

Carbon taxes have been implemented in multiple countries across the world.

Some have failed and are no longer in existence such as in Australia, and some are

success stories, such is the case in Great Britain. The success or failure of the tax

depends on the structure of the policy as well as the economy into which it is being

implemented. Research and data into the effects of implemented carbon tax policies are

very scarce. Not many reports have been done on them and there is very little data on

the actual policies. I could only find credible research papers that had been done for a

few countries; two of them were Great Britain’s and Australia’s carbon policies. These

two countries have had drastically different experiences concerning carbon taxation.

Great Britain is one country that has a carbon tax that is successful and actually

gaining support as the years go on. The tax was implemented in 2008 and by 2012 the

tax price was set at $30 per ton of C02, covering about 75% of greenhouse gas

emissions in the country (Murray, B., Rivers, N. 2015). It is also a revenue-neutral tax

policy, which means that all profits from the tax are distributed back to the public by way

of tax breaks as well as other means. This policy is a real success story and an

example to the rest of the world of how carbon taxes can actually be effective and

excepted in the eyes of the public. When the policy was first implemented in 2008 it was
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 8

opposed by the majority of the public, but after three years the public actually switched

its opinion and was in support of the policy. In Great Britain the policy has successfully

reduced greenhouse emissions by 5-15% (Murray, B., Rivers, N. 2015) since being

implemented. The brunt of the tax is taken on by the wealthiest households by

allocating more of the tax profit money to lower income households in Great Britain

which makes this policy highly progressive (Beck, M., Rivers, N., Wigle, R., Yonezawa,

H. 2015). It has also had some negative effects on the economy, but they have been

very well mitigated by the revenue-neutral nature of this policy.

When it comes to Australia’s carbon pricing situation it is leaning heavily toward

the negative side as their carbon tax policy was abolished in July of 2014 after being in

effect for only two years. The effects of the tax were mainly seen as negative and the

policy seems to have been rather poorly put together. In a paper titled “Australia’s

Carbon Tax: An Economic Evaluation”, the carbon taxes policy is scrutinized and picked

apart. It is clear from this paper that the carbon tax was inefficient. According to this

paper the main effect of the policy was the significant increase in electricity prices for

households and businesses along with no reduction in carbon emissions. The polices’

own model showed that their emissions were not expected to stop increasing until 2027,

which shows how ineffective this policy would have been. It was also shown that the

first effects on the electricity price was an increase of about 10% as well as GDP

reduction (A. Robson, 2014). Support for the policy was also non-existent as the

government had promised not to enact a carbon policy for a least two years and then

went back on their word. The increase in electricity, falling of GDP, inefficiency of
ENVIRONMENTAL AND ECONOMIC VIABLITY OF CARBON TAXATION 9

emissions reduction and no public support led to the demise of this carbon policy and

should be used as a learning opportunity.

Conclusions

After researching the different carbon tax policies that have been implemented

and multiple studies which use models to predict possible effects of carbon taxation, it

can be seen that a carbon tax is a possible solution to carbon emissions if it is done in

the correct way.

According to the prediction models that I have looked at, on paper, a carbon

pricing scheme should be possible and can be implemented with minimized economic

loss, although there will, more than likely, be some amount of loss. The sectors taxed,

welfare effects and the redistribution of profits are all very important areas to look at

when building a policy. For it to be an effective means of emissions reduction as well as

an economically viable solution, the policy must be tailor made to the country and

economy that it is being set forth.

In terms of implemented policies there are successes and there are also failures.

Australia’s policy was not designed well and incurred substantial negative economic

costs as well as being ineffective at carbon emission mitigation. This led to massive

public disapproval of the policy and ultimately an end to their carbon pricing policy. This

can be seen as a learning opportunity and will hopefully lead to a better understanding

of how to implement a carbon pricing scheme. In Great Britain however, their carbon

policy is actually becoming more favored by the public and efficient in terms of

economic loss compared to emissions reduction. This policy is shown as an example of

how a carbon tax, if done right can be an effective means to the reduction of our

emissions.

In the future we need to learn from our mistakes and build on our successes. We

can build a future for ourselves that is both profitable and healthy for us and the planet.

Both prediction models as well as failed and successful policies must both be examined

thoroughly if we are to implement policies that are both economically viable as well as

environmentally impactful. One of the next steps that could be taken in order for the

mitigation of our carbon emissions and the curbing of climate change is the

implementation of carbon taxes in all countries as soon as possible. If we can make it

an international mandate to decrease our carbon emissions, then countries will realize

that carbon tax policies are one of the best ways in which we can do that. If one policy

fails, then we can learn from those mistakes and design a successful one in the future.

The future of our planet depends on our ability to see in the long term and realize that

short term monetary gains are not worth the long term biological degradation of our

world.
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Benavente, J. (2016). Impact of a carbon tax on the Chilean economy: A computable

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carbon tax on the Chinese economy using a CGE model with a detailed
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[Link]

Huijuan, D., Hancheng, D., Yong, G., Tsuyoshi, F., Zhe, L., Yang, X., & Liang, T.
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