Goverment Business Relations — Carbon tax Essay Example

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Environmental protection is on the mind of every government these days. Though there is no single universally accepted environmental policy, governments have been trying to work with business investors to reduce carbon emissions. Carbon tax is the tax that is enforced on based on the amount of carbon that is emitted by fossil fuels during combustion. This is one of the options intended to reduce pollution other than the cap-and-trade schemes. A government in support of this tax sets a price per ton in carbon and then it is reflected in taxes in oil, electricity and natural gas. This tax makes use of carbon-rich fuels more expensive and in the long run business entities and individuals reduce consumption hence increase energy efficiency.

The carbon emitted from the combustion of fossil fuels has many negative effects. These effects include Ground level ozone, acid rain and global climate change (Pearce 1991). This tax is based on the principle of negative externalities. An externality is a benefit or the cost that is accrued from the production of goods or services. Therefore, negative externalities are costs that are not catered for. When an entity consumes fossil fuels, they create pollution which has a social cost because a lot of people suffer from the effects of pollution. The proponents of carbon tax want the price of fossil fuels to factor in these negative costs.

Governments and Businesses on Carbon Tax

Implementation of carbon tax in India

India introduced a carbon tax of 50 rupees per tonne of coal produced or imported to India. This tax was effective nationwide. Coal is India’s principle electricity source as it powers half of country’s electricity generation. India has interests in coal; some of which is sourced in Australia but it has had reservations because of the recently introduced carbon tax. The Indian government believes this would reduce the number of prospective investors of the energy industry (Stern 2007). This would lead to a significant reduction of jobs which would have been created if the carbon tax would not be in effect.

The Indian government has emphasized the need for a domestic carbon tax scheme to reduce carbon emission. India, however, is skeptic about a global carbon tax scheme. The Indian government has ordered its airlines not to pay tax as per the European Unions’ carbon taxation scheme. It further refused to send emission details of their aircraft to EU officials. The Indian government has since voiced its concerns over the negative effects this tax would have its airlines.

Implementation of carbon tax in USA

Collection of carbon tax, regulations governing this collection and how this tax is used is done by the Carbon Tax Center (CTC). Supporters of CTC agree that a carbon tax is the most economically efficient way of invoking carbon reduced investment. The levy of carbon tax is done at various points in production and consumption. Some of these taxes affect entities at the top of the supply network while others affect distributors. An alternative way of levying this tax is through electricity bills. Over time, it has been proved to be easier to tax consumption as compared to production (Larry 2006).

Consumers are cushioned from the effects of added costs by reducing other existing taxes or distributing revenue among households. Gradually it has been witnessed that the cap-and –trade with offsets cannot reach the targeted emissions reductions. The Environmental Protection Agency (EPA) has given mandatory rules pertaining to the improvement of efficiency of automobiles, and rules for Best Available Control Technology (BACT) in power plants and static forces. BACT is a combustion efficiency standard for carbon dioxide emissions (Carraro 1993).

When most of the large facilities are under strict regulation, there are concerns on possible job loss or economic imbalance. On the other hand, EPA has estimated that the carbon tax would help to reduce domestic greenhouse gas emissions by 12.9% by 2020 (Ramseur 2010). The flipside of carbon tax is that some small businesses whose operations are energy intensive will be the most affected. They will have to figure out ways of reducing the increased costs, and even though a portion of the money spent is pushed on to the consumer, it has to be fair.

Implementation of carbon tax in China

Economists and policy makers in China had suggested that the best time for initiating carbon tax is 2012. According to the Kyoto Protocol, the Annex 1 countries should execute their promise by the year 2012. The agreement reached by the Bali Road Map emphasizes that carbon responsibility will not only be applicable to developed countries; developing countries must also initiate emission reductions.

The best principle that China will adopt in carbon tax is to fix the starting tax at 20 Yuan per ton of carbon in 2012; then increasing it steadily to 50 Yuan/ton of carbon in 2020. The collections of carbon tax in 2012 are estimated at 40 billion Yuan and this funds will be invested in promoting industrial energy saving and encourage the development of renewal energy (Shi-Ling 2011). Carbon tax has not been fully embraced by Chinese businesses. The Civil Aviation of China (CAAC) urged the European Union (EU) to halt its plans to tax airlines for their carbon emissions. They claim the EU’s decision will constrict development of airlines, disfigure competition, create a burden for travelers and undermine trust in the world’s efforts to avoid climate change.

Implementation of carbon tax in Australia

In Australia, the 2006 Howard coalition government and Rudd Labor opposition had promised electorate to implement Emissions Trading Scheme before the 2007 election. The election was won by the Labor and went on to implement an ETS. The government reduced the Carbon Pollution Reduction Scheme which was supported by Liberals under the leadership by Malcolm Turnbull. In opposition, Tony Abott suggested that electricity consumers pay more, and this would raise the price of carbon without affecting the tax burden. Abott defeated Turnbull in a leadership challenge; Liberals thereafter opposed ETS.

Australia accounts for 1.5% of the worlds emissions, but in the developed countries segment, it is the world’s highest emitter per head of population. This is because of Australia’s relatively small population. The government decided that from 1 July 2012, the initial carbon price will be $23, and it will increase annually by 2.5% for the next three years (Milne 2010). In 2015, when the price of carbon will be fixed, the top 500 carbon emitters will be required to purchase carbon permits. A portion of these permits will be purchased through the Carbon Farming Initiative. Medium sized manufacturers, who are considered moderate emitters, will have to submit their carbon footprints to the National Greenhouse and Energy Reporting Act.

From 1st July, 2015,the price companies will pay for carbon emissions will vary with $15 per ton of carbon as the floor price (least price) and $20 as the ceiling price (highest price). Exemptions in the carbon tax scheme will be on the agricultural sector and users of light vehicle petrol (Ramseur 2010). Businesses that have been impacted most by the carbon tax are airlines, steel factories, mining firms and energy firms. The Australian government has since encouraged small businesses to be receptive of the carbon tax. This is because the consumers of their goods and services will be at a better financial position after payoffs from the carbon tax are distributed.


The idea of carbon tax has not been embraced by many governments and businesses. Some governments are skeptical on the effect it will have on their economy because of the competitive nature of the world today. Businesses want to operate where the labor is cheap, and some governments feel they could scare away investors because the carbon tax will increase the cost of operation, and consequently the cost of goods. China and India have been very apprehensive about the idea, and even though they are both signatories to the Kyoto protocol, they are yet to implement meaningful emission reduction mechanisms. Countries and businesses that have embraced the carbon tax idea fear for their future operations because the consequences of carbon tax are not yet clear. However, what is evident is the fact that everyone will gain and lose at some point but for the good of a sustainable tomorrow.

Carbon tax has various advantages. It improves the cost competitiveness of cheaper alternatives of energy. Tax on a less expensive fuel raises it is per British Thermal Unit (BTU) price to almost the same amount as cleaner forms of power (Porter and Claas 1995). One BTU of energy is the energy that can raise the temperature of a one pound of water by one degree. Carbon tax is stable, and business entities can monitor the price trends of carbon and, therefore, invest in alternative sources of energy. This is unlike the cap-and -trade schemes in which the price of carbon is largely dictated by weather and prevailing economic conditions (Shi-Ling 2009). The funds accumulated by the carbon tax can be used to subsidize environmental programs or as rebate. These funds can be rebated to the citizens through dividends that can be made annually or quarterly. The carbon tax laws are also easier to understand than the cap-and-trade system and, therefore, rallying public support over the carbon tax is easier.

On the flipside, production of goods may move to countries with lower carbon taxes. This will deprive the workforce of a country with a carbon tax scheme of its jobs. Carbon taxes also create administrations that will have to be shouldered by businesses and individuals. Carbon tax also improves the possibility of tax evasion. Increase in taxes will encourage companies to hide carbon emissions. Consumers resent new taxes and do not believe that the carbon tax is revenue neutral. Moreover, if demand is the price inelastic then tax will have to be very high for a significant reduction in demand (Larry 2006). The drawback of carbon tax notwithstanding, it is arguably the best way of reducing carbon emissions. It is easy to understand the collection of taxes and how rebates are allocated to households. The use of BTU is fair because it is a standardized measure in comparison to weight and volume which was used formerly in other emission reduction schemes.

List of References

Carraro, C 1993, The European carbon tax: An economic assessment, Springer, German.

Larry L 2006, Summary of book “Carbon trading: A critical conversation on climate change, privatization and power,” Dag Hammarskold Foundation, Durban Group for Climate and The Corner House.

Milne, J 2010, Critical issues in environmental taxation: International and comparative perspectives, Oxford University Press, London.

Pearce, W. D 1991, The role of carbon taxes in adjusting to global warming, Harper Press, New York.

Porter, M. E and Claas, V 1995, Towards a new conception of the environment-competitiveness relationship, Vancouver, Canada.

Ramseur, L. J 2010, Carbon tax and Greenhouse gas control: Options and considerations for congress, Bibliogov, London.

Shi-Ling, H 2009, The reality of carbon taxes in the 21st century, Milne, J. E., Speck, S., Skou, A. and Duff, D. G. Reviewed in Tax Notes International 54 5: 398-400.

Shi-Ling, H 2011, The Case for a Carbon Tax: Getting past our hang-ups to effective climate policy, Island Press, USA.

Stern, N 2007, The Economics of climate change: Pricing carbon to encourage emissions reduction, Prentice Hall, New York.