By BCD marketplace partner Thrust Carbon
The term ‘carbon tax’ is frequently discussed among academics, journalists, and government officials. It may seem like a somewhat impersonal concept, but it holds significant potential for achieving a net zero future.
In this article, we will delve into the following aspects:
– Understanding Carbon Taxes: A concise explanation of what carbon taxes entail.
– The Intriguing Power of Carbon Taxes: Exploring why carbon taxes are both powerful and fascinating.
– Qualities of an Effective Carbon Tax: Identifying the key attributes of a well-designed carbon tax.
– Real-world Examples: Examining instances, including a case study from a different perspective.
So, what are carbon taxes?
Quite simply, a carbon tax is a tax on carbon emissions. However, there is a bit more to it than that, which is where things get interesting!
Carbon taxes are generally applied to activities which involve burning fossil fuels, with higher emissions incurring higher taxes. Nevertheless, the methods of applying these taxes vary significantly. They can take the form of an extra charge passed on to consumers – like a sales tax. Or they can be almost invisible, something companies pay but which individuals on the street never notice – like a tax on company operations. Moreover, these taxes can be flat and straightforward, such as £5 or $20 on a particular product type, or they can escalate in direct proportion to the emissions produced.
In all these cases, the primary aim of a carbon tax is to disincentivize and reduce carbon emissions by making products and services which are responsible for pollution less economically appealing
What makes carbon taxes so exciting?
It’s not often a tax is called exciting, but I’d like to ask everyone to make an exception in this case!
The thing is, we all know that the time is ticking away if we want to meet net zero. And there are thousands, if not millions of things governments can and should be doing to reduce emissions, from installing heat pumps in homes and electrifying rail travel to getting more wind and solar built.
But many people would admit that governments aren’t necessarily the best at making precise decisions. The world is just too complex and fast moving. What if a government decided to convert trains from diesel to hydrogen, only to find out 5 years later that battery trains are better and cheaper? What if a government wanted to insulate millions of homes, but struggled to work with the thousands of building companies to do so?
In other words, above all, carbon taxes have the potential to make things simple and efficient.
Rather than betting on a certain technology for rail decarbonization, a tax could simply be applied to diesel trains, incentivizing train operators to find greener solutions in the most cost-efficient manner, depending on how various technologies evolve over time. Instead of creating a complex system of car registration and charges based on their pollution levels (we’re looking at you, London), simply increasing taxes on diesel and petrol would, over time, nudge people to drive less or buy cleaner cars.
What makes a good carbon tax?
Obviously, this will depend on the exact circumstances of the tax. But here are some rules of thumb:
– A good carbon tax should be simple and broadly applied. This means that businesses or consumers should be able to operate it easily without lots of expertise and red tape. Equally, it should be broadly applied (across whole industries or types of activity) so that loopholes don’t emerge.
– A good carbon tax should be cheap to operate. If it costs lots for businesses to operate a tax, this risks losing buy-in. If it costs lots for authorities to operate a tax, the revenue raised is effectively cancelled out, rather than being available for other purposes.
– A good carbon tax should be effective but not penalizing. If a carbon tax is set too low, a fossil fuel-based product or service may still be cheapest meaning no behavior is influenced! On the other hand, a tax should not penalize those less able to pay, or where there is little immediate option to change behavior.
– A good carbon tax could raise money for sustainability projects or for those less able to pay. For example, money raised from a carbon tax on petrol and diesel vehicle use could be used to fund grants for EV purchases or reduced bus fares.
What can we learn from current carbon and other green taxes?
Firstly, it’s worth understanding that carbon taxes have been around in all but name for a very long time. For example, almost every country utilizes some sort of fuel duty, which makes private vehicle usage more expensive relative to public transport. While this may not be meant as a carbon tax, it acts as one.
More exciting: it is eminently possible to go much bigger and bolder! Denmark has committed to implementing a broad-based carbon tax across its economy. In fact, the Danish government is so optimistic that its tax minister called the tax “the biggest single contribution so far to cut emissions by 2030”. It is staggering that such a simple mechanism as a carbon tax – rather than thousands of individual laws or policies – could be the main way for nations to secure net zero and, ultimately, limit the catastrophic effects of the climate crisis. Imagine what would happen if such taxes were applied by countries worldwide!
Lastly, there is real evidence that taxes in other areas of sustainability make a real difference to behavior! If you live in the UK, like me, you may even be able to spot signs of this around your own home. In April 2022, the British government introduced a plastic packaging tax. It didn’t focus on any specific type of product or packaging (broad) and had just one or two rules (making it simple). In particular, it specified that any companies using plastic packaging that was not at least 30% recycled would need to pay a modest tax (not overly penalizing). Can it be any coincidence, therefore, that this major shower gel company, as well as makers of numerous other household products, now commit to using 30% recycled packaging? The law has clearly been effective enough to change corporate behavior without dramatically raising prices, and has been designed in such a way that the tax rate or percentage of recycled plastic demanded could gently be increased from 30% (indeed, that is what many are now calling for, believing the tax is too lenient).
Next stop… more tax!
As long as carbon taxes are well-designed, they have simply enormous potential to transform our ability to tackle net zero. Don’t just take our word for it though – the International Monetary Fund (IMF) and many scientists globally agree!
And of course, carbon taxes can also be simply and efficiently applied within corporate organizations and travel programs via carbon pricing and a variety of other mechanisms. Thrust Carbon’s expert advisory teams can help to design these, while our award-winning products make their execution effortless.
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