Carbon taxes are taxes which are applied to fuels that generate carbon emissions as they create energy. Several nations use carbon taxes as an attempt to encourage businesses to pursue alternative fuels and to promote environmental consciousness, and some economists have proposed that more countries around the world should create a carbon tax framework. The rise of awareness about carbon taxes illustrates a general global interest in environmental issues and a desire by consumers to correct environmental problems caused by industry.
Different fuels contain varying amounts of carbon, and carbon taxes are designed to be very precise. Essentially, a nation places a set tax on a certain volume emission of carbon. Since the carbon emission rates of fossil fuels are known, when these fuels are sold, a carbon tax can be built into the sale, with the price of the tax varying depending on how clean the fuel is.
The primary advantage of carbon taxes is that they raise awareness about environmental issues, and they push companies to pursue more environmentally friendly methods of energy generation. Essentially, they constitute a mild punishment for using unclean fuels, and since most companies are concerned about their bottom line, these companies may pursue cleaner fuels in lieu of having to propose a price hike which might anger their customers.
Carbon emissions are an example of what is known as a negative externality in economics. A negative externality affects people who are outside of a transaction. For example, many people believe that second hand smoke is harmful, making cigarettes another case of a negative externality; when someone purchases a pack of cigarettes and lights up, people who were not involved in the purchase may suffer as a result of second hand smoke exposure.
Some economists support taxes on negative externalities such as pollution because they encourage companies to seek out cleaner operating methods and they provide a fund which can be used for environmental restoration, education, and similar work. Consumers can also appreciate a tax on energy sources when they see the benefits of that tax in the form of government investment in alternative fuels, or a proliferation of cleaner technologies.
Economists also point out that carbon taxes levy a fee on pollution, something which is considered bad, rather than income, which is generally viewed as positive. Taxes which target negative externalities are known as Pigovian taxes, after Arthur Pigou, a French economist who proposed a taxation system to correct or compensate for such externalities.