What is a carbon tax?

We’re not the only ones who are wondering if the UK’s new carbon tax might be worth it. 

And what if it is? 

There are two major caveats to this.

Firstly, it will be a regressive carbon tax, and as such, it is likely to do more damage to the economy than it would to the environment. 

Secondly, it might not work as well as we think. 

In an environment where emissions are rising faster than economic growth, it would not be surprising if the government failed to make any impact on carbon emissions. 

But this is not the case. 

There is a strong case to be made that a carbon price is a good idea. 

Its a tax that is not based on how much you emit, but rather on how efficiently you do it.

A carbon tax is a price on carbon, rather than on the amount of carbon emitted. 

This is why, if the carbon price was applied to a basket of goods and services, such as electricity and gas, its effectiveness would be greater. 

The UK’s carbon tax has two major components: the carbon tax levied at retail and at wholesale. 

Retailers are responsible for determining what is taxed at their location. 

Wholesale prices are fixed and are based on the quantity of goods or services consumed at their premises. 

A carbon tax on retail would therefore have a higher carbon intensity per unit of product than a carbon taxes levied at wholesale (the carbon intensity of a given basket of products) and would therefore increase the overall impact of a carbon pricing scheme. 

How can a carbon fee be a carbon levy? 

If the carbon fee is a levy, then it is a tax on carbon and thus will also raise revenue. 

For this reason, a carbon carbon tax could be applied to wholesale transactions, but not retail transactions. 

That means that a tax based on retail is unlikely to have any effect on emissions, since carbon intensity does not increase with increasing volume. 

It is worth noting that the UK government is already considering applying the carbon levy to some transactions, including online shopping. 

What are the other major drawbacks? 

It might be hard to get a carbon rate on the ballot paper, but if we were to have a carbon taxation scheme, it has a number of downsides. 

Firstly, it could result in the carbon rate being more volatile than the market rate. 

As we saw with the Howard government’s carbon levy, the market price can fluctuate, which means that there are often winners and losers when it comes to carbon prices. 

Moreover, the carbon taxation system is likely not to work as a carbon mitigation strategy, which would lead to an increase in carbon emissions over time. 

Finally, the tax could also be ineffective, since it does not target emissions directly, rather it targets the net emissions produced by the economy. 

Thus, the policy could actually reduce emissions, but this would likely be at the cost of reducing emissions by other economic activities. 

Is there a way around these drawbacks?

There is no one-size-fits-all approach to a carbon polluter tax. 

Some carbon polluters may prefer to avoid direct taxes, or choose to pay a rebate to offset the cost. 

However, there is also the potential for some to opt for a carbon tariff. 

Such a policy would levy a tariff on carbon emitted by the carbon polluting activity. 

Given that the rebate could only be spent by the polluter, the overall cost of the policy would be borne by consumers, businesses and the economy as a whole. 

An alternative to a tax is to tax carbon sources that are not directly related to the emission source. 

These could include the use of renewables and biofuels, which may not be directly associated with carbon emissions, and therefore are likely to be less affected by the policy. 

Another option is to use a carbon capture and storage (CCS) system, which could capture emissions directly from a carbon emitting source, and capture those emissions onsite. 

Both of these policies are likely more cost-effective, but they also require a reduction in emissions, which can also have a negative effect on the economy, in terms of reduced demand for goods and labour. 

One thing that is clear is that a system that targets carbon intensity rather than emission intensity is likely be a better approach. 

Where can I find out more? 

We have put together a downloadable guide to a number in the Carbon Tax Debate, which you can download here. 

You can also find out how much carbon you can expect to pay under the carbon pollution trading scheme (CPTS) by using the CDP. 

Alternatively, you can find out the tax rates that have been put forward in the government’s climate change strategy by looking at the CPA report, which is available from the UK Department for Business, Energy and Industrial Strategy (BEIS). 

If you have questions about the Carbon Polluter Tax, or the other carbon

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