Can someone explain how carbon taxes offset the negative environmental impact fossil fuels have on our environment?
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Without carbon taxes CO2 emissions that harm the environment are not an impact to the people involved, what is called a negative externality. If two factories release 100t of CO2 per day, and could spend money to reduce that emission, they won’t do it because it costs money and the harm doesn’t impact their bottom line. The harm impacts everyone, but to a very small degree.
If you put a tax on carbon emissions then both factories have an additional cost of doing business. They can pass that on to their consumers in the form of higher prices. This balances the externality, everybody is harmed by CO2 and everybody pays a little more.
In this situation, markets are more effective, maybe Factory A can change their process by installing a different machine or process. They can cut 30t of emissions, and have to raise prices less. That makes their product more affordable, and they start to take sales and profits from the other factory.
In this market situation, Factory B might cut 40t of emissions through a more extensive change. Now their product is cheaper, and some customers move to it. All consumers are still paying more, and they hope the government is using that money for something good, but the companies have made major changes to reduce emissions – what we all want them to do – and they will do more if they can think of a way to do that.
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