Carbon Tax: Paying for Pollution


Emma owns a business that makes and sells bathing suits. As the company owner, her primary concern is maximizing profits by selling many bathing suits. She may not think much about the carbon dioxide emissions caused by the manufacturing and shipping of her product, especially if processes that use fossil fuels are her cheapest option. But what if they weren’t?


Taxing carbon, a harmful greenhouse gas, is one proposed solution for reducing the amount of carbon in the atmosphere. A carbon tax encourages a shift from fossil fuel-based energy sources to renewable sources by gradually raising the price. If Emma’s bathing suit company faced tax increases, she would likely look for alternatives to avoid the rising costs. Supporters of a carbon tax believe that forcing businesses and consumers to pay will motivate them to choose renewable energy sources instead of oil and coal-based options. 

Carbon Tax Definition

A carbon tax is a tax placed on the carbon content of fuels, like gas, forcing those who sell and use them to pay more. The tax is a form of carbon pricing, or placing a fee on the amount of carbon emitted, and is a market-based approach to limiting the amount of carbon dioxide in the atmosphere. The carbon tax is a proposed solution to hold businesses and consumers accountable for the emissions they contribute to the environment and encourage switching to renewable energy sources. 

How It Works

The process of implementing a carbon tax begins by deciding who will pay said tax. If placed at the beginning of the energy supply chain, the tax will apply to suppliers of coal and other fossil fuel energy sources. If the government levies the tax farther down the supply chain, it will affect individual households using fossil fuel energy sources. Policymakers can raise the carbon tax over time to encourage businesses to invest in greener technologies and avoid paying more. However, low-income consumers will also face increased costs for goods such as gas.

Many argue that the tax should primarily affect big companies and industries that use large amounts of fossil fuels, especially in the energy and transportation industries. Still, critics of carbon taxes argue that they raise heating and cooling costs. They say that it’s an "intrusive measure" by the government that increases citizens’ cost of living. A carbon tax could also harm businesses by making them less competitive as the tax rises. Another possible drawback is that companies may relocate to countries with fewer environmental restrictions and outsource the carbon pollution, known as carbon leakage.

To address some of these concerns, carbon tax researchers have suggested that the revenue could be redistributed to taxpayers in the form of a dividend, or sum of money that the government pays regularly. This way, the funds have a positive impact even beyond protecting our planet. Still, what the government does with the revenue is a political decision. It could give the money back to the consumer, but it could also invest the funds in engineering low carbon technologies, possibly saving consumers more money in the long run. 

Carbon taxes are already in place in various countries. For every metric ton of carbon dioxide released in Chile, there is a five dollar fee, which predominantly affects energy companies. Projections predict that this tax will decrease fossil fuel generation in Chile 30 percent from 2007 levels by 2030, and grow the country’s renewable energy industry. However, carbon taxes range greatly from country to country. In Sweden, the carbon tax is $123 per ton of carbon dioxide produced, whereas in Poland, the tax is only $0.08 per ton emitted. 

So What?

A carbon tax is one of many possible solutions to mitigate the harmful consequences of climate change. The carbon tax can be a double dividend, reducing emissions and redirecting money to consumers. Proceeds could reduce payroll or corporate taxes. They could also be used to alleviate the burden of higher energy costs on low-income households.

However, this potential impact on low-income consumers is a key drawback to a carbon tax. Additionally, once the government begins to depend on the revenue, it is unlikely to reduce the carbon tax, even if emissions decline. Others argue that companies may pass the cost on to consumers, leaving the biggest contributors of carbon emissions with little incentive to change their behavior.

There are other options besides a carbon tax for reducing emissions, such as carbon offsets and tax breaks for companies that use renewable energy. These methods, and similar ones, can be used independently of the carbon tax, or in conjunction with it for maximum effect.

By beginning with a moderate carbon tax, the government can set the fee to rise in the future. This way, consumers and corporations are less likely to continue using fossil fuel-based energy sources. Knowing a broad range of energy policy solutions encourages people like you to make changes and advocate for a more sustainable future.

Think Further

  1. What are some benefits and drawbacks of a carbon tax?
  2. How do you think the revenue from a carbon tax should be used? Why?
  3. Who should pay a carbon tax, and why?


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Learn More

  1. Benavente, José Miguel García. “Impact of a Carbon Tax on the Chilean Economy: A Computable General Equilibrium Analysis.” Energy Economics, vol. 57, 2016, pp. 106–127., doi:10.1016/j.eneco.2016.04.014.
  2. “Carbon Tax Basics.” Center for Climate and Energy Solutions, 12 Aug. 2019,
  3. “Climate Change.” United Nations, United Nations,
  4. Jagoda, Naomi. “Conservative Groups Tell Congress: ‘We Oppose Any Carbon Tax’.” TheHill, The Hill, 10 June 2019,
  5. Mintz, Jack, and Mark Jaccard. “The Carbon Tax Tango.” Alternatives Journal, vol. 32, no. 3, 2006, pp. 32–35. JSTOR,