Global warming is a hot topic these days, and the reduction of greenhouse gases is becoming a significant challenge for many countries. Does carbon tax help in reducing GHG emissions?
Commodity ObserverLevel 1
What is a carbon tax, and how does it work?
Greenhouse gas emission has created many problems like ozone depletion, acid rain, climate change etc. It becomes a challenge for many countries to reduce carbon emissions. To combat global warming, governments employ two main approaches, one is cap-and-trade schemes, and another one is a carbon tax on carbon emissions.
A carbon tax is a fee imposed on combustion of carbon-based fuels (coal, gas and oil). It aims to discourage the use of fossil fuels to reduce emissions. This motivates industries to go for renewable energy sources.
The underlying idea of the carbon tax is based on the economic principle of negative externalities. It is levied at a different stage of production and consumption. Some taxes targets top tier of the supply chain like tax is charged on transactions between oil wellheads and producers. Other is directly applicable to distributors and users. There is a variety of carbon taxes implemented at different stages.
Carbon tax system varies among different countries; each country has its system. Supporters of carbon tax suggest that money raised from it should be used for subsidising the environmental projects and R&D to innovate alternative energy resources.
To combat climate change, Germany is going to set the price for CO2 emissions from transport & heating buildings industry to €25/tonne from 2021.
The map shows the global resource and emission flows under full international trading by 2050.
(Source: World Bank)