Eli5 what carbon taxes do exactly?


Can someone explain how carbon taxes offset the negative environmental impact fossil fuels have on our environment?

In: 6

They don’t, they merely pass the costs along to other companies or consumers. The idea is, a company is taxed say 10 dollars for every 10 cubic feet of carbon it produces. The idea is that if they produce less carbon, the tax will be lower, so theoretically they’re incentivized to produce less. But, right now there’s often an option for companies to buy extra credits, so they don’t actually have to reduce their emission, they just pay a fee. Which usually just gets rolled into the price of whatever they’re producing, meaning in the end customers pay for it. And if a company isn’t large enough to buy extra, they pay the taxes, or if there’s a cap on how much CO2 is allowed to be produced per company, if they do not have the resources to upgrade or retrofit existing CO2 production, they may just close entirely, or dramatically cut back production.

They don’t directly.

What they do is give a financial incentive to companies to reduce the emissions. One of the driving factors behind companies resisting the steps to reduce emissions is cost of creating and implementing the reductions. So the idea is to use taxes to make the cost of NOT doing so higher than the cost of reduction.

With the pitched upside that the money gained from the taxes can be used to fund green initiatives and other programs.

But if the taxes aren’t high enough, they just become another cost of doing business.

Editing to add another down side I forgot but saw in u/DarkAlman’s answer. The taxes also don’t work when the company is able to use the extra tax to justify higher prices. So they just pass the tax on to customers and keep their bottom line.

They move the price of dealing with the effect of carbon emissions onto the producer of those emissions. A price which affects all of society but which is not considered by the producer is called a negative externality, and is exactly what we have with carbon emissions. By moving the cost of cleanup onto the producer you get a more appropriate price for whatever the thing is.

So for example consider electricity generation. A given supplier needs to buy electricity from producers: they don’t care whether that is wind or coal power. By including the price of carbon in the coal power we make it less competitive, so less coal power will be bought and less coal will be burned.

The theory of the Carbon tax is to punish companies for having high CO2 emissions and encourage them to adopt greener technologies to offset the cost.

The taxes in turn are used by the government to fund green technology initiatives

At least in theory… in practice it depends on how the government manages the program.

Many argue that carbon taxes just increase costs to consumers without much benefit and that the government would be better off giving incentives instead of punishment.

overall they do nothing to offset it.

they are meant to discourage abusing on emissions by fining companies going over the limit and these funds collected in this manner are meant to be used in initiatives to fund “greener” tech.the intent is not going green should be more expensive to incentivize change.

the problem is that this setup is completely undermined by the fact these same companies can buy ” carbon credits” and this expenditure is then passed along to consumers..