Eli5: How exactly does a carbon tax work and is there any real downside to implementing one?


I’m deeply curious about the implementation of a carbon tax on large corporations, as it seems like an economically straightforward means of beginning to combat climate change on a larger scale. However, I’m not certain of the specifics/variety of carbon taxes which have been proposed and also lack a sufficient knowledge of economics to know if there are any difficult-to-discern downsides to the concept (My education is in ecology so I’m only seeing benefits of such an idea). I’d love to be more educated on the topic, and know why it hasn’t received widespread acceptance yet.

In: Economics

A carbon tax requires companies that produce carbon to pay an extra tax. This increases the costs for things like coal and natural gas power plants. Which reduces their profits. Subsequently it also makes alternative energy producers such as nuclear, wind and solar more competitive which further reduces their profits.

A carbon tax would do wonders for reducing carbon output, combating climate change and making energy production markets more competetively priced. But it would negatively impact profits for companies relying on fossil fuels. So they are doing everything they can to stop a carbon tax from being implemented.

Fossil fuel companies dont care all that much about climate change. What they care about is staying in business, keeping their thousands of employees employed and making money.

Fossil fuels are really cheap. Incredibly cheap. Even gasoline, an oil product that requires advanced refining before it’s trucked to cities hundreds of miles away and sold to consumers, is still cheaper per gallon than milk. Fossil fuels are also incredibly efficient – a few gallons of gas can drive twice as far as a fully-charged electric car, and its refining byproducts can make enough plastic for hundreds of consumer goods.

This means that a company that wants to avoid burning fossil fuels will pay a massive premium and could never compete with another company on price. Not only will the competitor’s product be cheaper, but they can do all kinds of fuel-intensive strategies, like outsourced manufacturing, international and cross-country sales, and cheap disposable materials that are simply impossible for a carbon-free business.

The carbon tax is effectively an artificial cost increase that makes these carbon-intensive strategies more expensive. While they don’t ban fossil fuels outright, they reduce the competitive difference between carbon-free and carbon-intensive from impossible to difficult.

What the government does with the money is irrelevant. The important part is that sustainable manufacturing and logistics becomes cheaper relative to carbon-intensive operations.

There are lots of problems with a carbon tax. The hardest is implementation – companies can’t be trusted to accurately report their emissions, and the EPA is way too understaffed to constantly sample tailpipes and smokestacks. It’s just too easy to cheat.

The second is global economics. A consequence of our peaceful, internationally-distributed world is that if one country’s laws are expensive, you can move to another country. If you’re paying a lot of carbon tax to manufacture in Michigan, just manufacture in Guandong instead and pay a smaller tax to import the product. This presents a political snafu – either coordinate literally the entire world into a unified carbon agreement, enrage a friendly nation by imposing tariffs, or watch your country’s manufacturing leave town for cheaper factories which may be even worse for the environment.

There’s the political pressure. A successful carbon tax will increase companies’ operating costs – it’s unavoidable, since low-emissions fuel and polymers are massively more expensive than petrochemicals. Products and services will become much more expensive, and companies will need to close factories and lay workers off to contain their costs. Households will lose even more disposable income, and many will be literally priced out of commuting to work or buying consumer goods. The average citizen and the largest corporations are motivated to eliminate the tax, making it a nightmare to enact and defend.

From a microeconomics perspective, a carbon tax basically obliterates the low-end consumer segment. The materials, parts, and logistics become so expensive that it’s not even worth offering the product.

Finally, probably the hardest to crack, is the military. The Pentagon reported that 80% of America’s federal fuel consumption is by the various military branches. Even in peacetime, the military’s logistics, manufacturing, peacekeeping operations, readiness exercises, and general saber-rattling release a lot of gas. Arguing that the country should weaken its defensive ability, or multiply its costs along with the NATO peacekeeping force, UN peacekeepers, and other military organizations overseen by the US, is political suicide, let alone poor geopolitical strategy.

One of the drawbacks is it sends out the message that it’s OK to pollute if you have the money.
To be effective a carbon tax has to be very high, that’s not something many politicians would like to do.
There’s also the problem of deciding what the carbon footprint of a product is. Take a tin can for example. The steel may, or may not be recycled, or it could be a mixture of both. Making steel from scrap has a lower carbon footprint than making it from iron ore. Steel is an internationally traded item, so tracing it’s origins has difficulties. Not all countries are free from corruption so in many cases certificates of origin are worthless.

Leaving aside the practical issues of implementation, the economic idea behind a carbon tax is to properly price the economic consequences of carbon emissions. Right now, if you pay for a gallon of gas, you’re covering the cost to pump it out of the ground, refine it, and transport it, but there are other costs that ought to be considered. Using that gallon of gas emits carbon, which has negative environmental effects. If rising ocean levels force the Chinese government to erect dykes, someone has to pay for it, but there’s no coherent system right now to ensure that everyone pays for it in proportion to their responsibility for the problem. Adding an extra tax to the gas (especially if the tax revenue is put into a fund for repairing damage done by climate change) is the most straightforward way to adjust that price. In turn, this would reduce people’s use of fossil fuels.

A carbon tax would make a lot of stuff more expensive. Basically everything spends some time being transported in a vehicle that burns gas to move. This isn’t an issue per-se, because again, the main argument for a carbon tax is that these things already *are* more expensive, but just in ways that don’t manifest in the price you pay at the pump. However, one sticking point is that reasonable people can come to extremely different conclusions about how big the tax ought to be. You need estimates of not just the path of climate change, but the human-scale consequences of that change *and* the cost to put everything right. Underestimating is bad because it will allow negative consequences of climate change to go untreated. Overestimating is ALSO bad. This isn’t just about the profits of fossil fuel companies; we’re talking about consumer-level prices for lots of basic goods. Making that stuff more expensive for no good reason would cause a lot of unnecessary suffering.

**Please read this entire message**

Your submission has been removed for the following reason(s):

* Discussion of religious or political beliefs are not allowed on ELI5 (Rule 2).

If you would like this removal reviewed, please read the [detailed rules](https://www.reddit.com/r/explainlikeimfive/wiki/detailed_rules) first. If you still feel the removal should be reviewed, please [message the moderators.](http://www.reddit.com/message/compose?to=%2Fr%2Fexplainlikeimfive&subject=Can%20you%20review%20my%20thread?)