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Paying the Price of Emission

Saturday, May 1st, 2010

What if you have to pay more tax on top of your gas charge just because you use more gas than your neighbors? Would you think the tax is too much? Due to increasing concerns about climate change and greenhouse gas emissions, many countries – mostly in Europe – have already established and/or proposed a carbon tax. Not good news if you were a heavy user of gas.

So what is a carbon tax? A carbon tax, a kind of environmental tax, is a tax on the carbon dioxide emissions from the burning of fossil fuels such as coal, petroleum, gasoline and natural gas. Carbon dioxide is a greenhouse gas (GHG) that traps heat and raises the air temperature higher than the general temperature, much like the effect of a greenhouse, hence its name. As many nations have become highly industrialized, there are more plants and factories established all over the world. These facilities continuously emit more pollution into the air. To reduce the emissions of carbon dioxide, a carbon tax is charged to those corporations and households that produce more GHG emissions.

Recently, many think tanks began discussing when and how a carbon tax should be established in Korea. In March 2010, the Korea Institute of Public Finance (KI PF) strongly recommended the Korean government to consider establishing a carbon tax as one of its taxation schemes.

Dr. Jeon Byung-mok, director of KI PF, said at an economic policy forum, “To meet the expectation of greenhouse gas reduction, it is encouraged to consider a carbon tax along with carbon emissions trading.”

While KI PF suggested a carbon tax without mentioning a direct tax reduction (a carbon tax is an indirect tax), the Korea Energy Economics Institute (KEEI ) insisted that establishing a carbon tax should be considered along with a reduction of income tax and corporate taxes. In a recent expert forum on government policy, Oh Jin-kyu, a climate change researcher, said, “It is necessary to adopt a carbon tax system in stages.” He suggested a plan to establish a carbon tax while reducing income tax and corporate taxes like EU countries.

Responding to the suggestion, the Korean government replied that the introduction of a carbon tax is not easy to decide immediately. Joo Young-sup, an official at the Ministry of Strategy and Finance, said, “Adopting a carbon tax requires cooperation with other countries; we are likely to decide the time to adopt a carbon tax after a good discussion with neighboring countries.”

A carbon tax is already very familiar in European countries. During the 1990’s, a carbon tax was established in Sweden, Finland and Denmark.

On Jan. 1, 1991, Sweden enacted a carbon tax, placing a tax of 0.25 SEK /kg ($100 per ton) on the use of oil, coal, natural gas, liquefied petroleum gas, petrol and aviation fuel used in domestic travel.

Finland established a carbon tax in 1990 as one of the first countries to do so in the world. Government officials placed a tax at $90 per ton of carbon emissions. Some corporations were exempt and only had to pay half of the portion.

Denmark also initiated a carbon tax in 1990. The country set a carbon tax at a relatively low level of around $50 per ton of carbon emissions. Businesses had to pay only half of the portion.

Norway established a carbon tax of $65 per ton of emissions in 1991.

The Netherlands also initiated a carbon tax in 1990. However, not all European countries enacted a carbon tax. In 2009, France planned to initiate a carbon tax with a new levy on oil, gas and coal consumption by households and businesses coming into effect during 2010. The new carbon tax was set at $25 per ton of carbon dioxide. However, the plan was blocked by the French Constitutional Council on Dec. 30, citing too many exceptions, leaving half of the emissions untaxed. Recently, French President Nicholas Sarkozy said he plans on withdrawing a carbon tax.

In 1993, the UK government introduced a kind of environmental tax on retail petroleum products. The tax was designed to reduce carbon dioxide emissions in the transport sector. But this carbon tax was cancelled in 1999 due to political criticism.

In the Republic of Ireland, a carbon tax of $20 per ton was introduced in the 2010 budget in December 2009.

Recently, the European Commission said it will soon propose an EU-wide minimum tax on the use of automobile fuel, coal and natural gas and the draft legislation would be presented in the coming months. Until now, the EU head office has resisted pushing for a carbon tax because the issue has divided the 27 EU governments. Such a tax would require their unanimous approval.

In North America, very few states and/or provinces adopted a carbon tax system. In Boulder, Colorado, the first municipal carbon tax was passed in November 2006. It was a tax on electricity consumption. Revenues go to fund programs by the city to reduce greenhouse gas emissions and the tax generates roughly $1 million annually. In May 2008, the Bay Area Air Quality Management District, which covers nine counties in the San Francisco Bay Area, passed a carbon tax on businesses of 4.4 cents per ton of carbon emissions.

The French speaking province of Quebec became the first province in Canada to introduce a carbon tax. Energy producers were taxed, beginning Oct. 1, 2007, with revenue going to energy efficiency programs. On Feb. 19, 2008, the province of British Columbia announced its plan to implement a carbon tax of $10 per ton of carbon dioxide-equivalent emissions beginning July 1, 2008, making British Columbia the first North American Jurisdiction to implement a carbon tax.

Asia-Pacific countries also have joined the line of these front running countries. The New Zealand government proposed a carbon tax in order to meet obligations under the Kyoto Protocol in 2005. The plan set an emissions price at NZ$15 per ton of carbon dioxide emissions equivalent. The planned tax was scheduled to take effect from April 2007, however, after the election the proposed tax was abandoned in December 2005 due to the opposition of the minority parties. Later in 2008, the New Zealand Emissions Trading Scheme was passed into law.

Currently, the Australian government seems intent on pursuing a cap-and-trade system rather than a carbon tax. The Australian Greens propose an interim carbon tax of AU$23 per ton for two years.

Japan also seems ready to join the line pretty soon. The Japanese government considers adopting a carbon tax in 2011. The Chinese government also introduced its road map for enacting a carbon tax in September 2009, mentioning that it is advisable to establish a carbon tax between 2010 and 2013.

The main reason to enact a carbon tax is to change the behavior of consumers, households and businesses. A tax on oil and gas would be a burden on households and businesses, which encourage them to change their energy consuming behavior and get industry to be more energy efficient, not just to pay the carbon tax.

Many economists believe a tax on carbon dioxide is the most efficient market approach to climate change, because a carbon tax has the following advantages; predictable price, easier understanding and revenue can be returned via tax cuts and/or used for the public good.

Of course, there are people who do not favor a carbon tax.

Irish people were concerned when there was rising speculation that a carbon tax would be introduced in the government’s supplementary April 2009 budget. Especially, rural dwellers that make up about one third of the Irish population worried about a carbon tax that would weigh more heavily on their households.

Also, since there is no limit on the amount of carbon that can be emitted, taxation cannot guarantee a reduction in greenhouse gas emissions.

James Emanuel, Commercial director of Cantor- CO2e, said, “Carbon taxes would be levied locally and so impossible to properly administer on a global scale. Moreover, taxation cannot guarantee a carbon emission reduction. Emitters could opt to pay the tax and continue emitting at will.”

There is a growing debate between two competing climate change policy instruments, carbon taxes and cap-and-trade (or emissions trading).

A cap on greenhouse gas emissions is an alternative government policy to a carbon tax. Emission levels of greenhouse gases are capped and permits to pollute are freely allocated or auctioned to polluters. Auctioning permits raises revenues that can be used to reduce taxes and improve overall efficiency. A market may be allowed for these emission permits so that polluters can trade some or all of their permits with others, namely, cap-and-trade.

Emanuel also favors cap-and-trade over a carbon tax and said “A cap-and-trade solution introduces a carbon ceiling and the price acts as no more than a useful barometer of how close we are to achieving that goal. Prices will tend to zero as the requisite level of emission reductions is achieved.”

He added that he thinks the objective ought to be to achieve the environmental goal at the lowest unit cost and the goal can only be accomplished through the flexibility of emissions trading.

A cap-and-trade scheme is more appealing to private industry. By decreasing emissions, firms can actually profit by selling their excess greenhouse gas allowances. Creating such a market for pollution could potentially drive emissions reductions below targets. Generally, transferring resources between private entities is more appealing than transfers to government.

A carbon tax would offer a broader scope for emissions reductions. Trading systems can only be implemented among private firms or countries excluding individual consumers (transaction costs would be prohibitively high if commuters needed permits to fill up their cars with gas). Carbon taxes extend to all carbon-based fuel consumption, including gasoline, boiler oil and aviation fuels. Trading systems may not be able to reach parts of the transportation and service sectors that could account for 30-50 percent of emissions.

So which is better? It is not a simple question to answer and the policies are not necessarily mutually exclusive. Many governments actually combine a carbon tax and cap-and-trade policies to reduce greenhouse gases. Each policy has several important advantages and drawbacks.

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