Carbon Tax and Feed-In Tariff

The Pros and Cons of a Carbon Tax and Feed-In Tariff and Which Is More Feasible In America

The Pros and Cons of a Carbon Tax and Feed-In Tariff and Which Is More Feasible In America

Carbon Tax

A carbon tax is a tax on the carbon content of fossil fuels and is effectively a tax on the carbon dioxide emitted when fuels are burned. Carbon taxes are easy to calculate because the precise carbon content of every form of fossil fuel is well known, and most fuels emit carbon dioxide in direct proportion to their carbon content. Because the carbon content of natural gas, oil, and coal vary, a carbon tax would be based on British thermal units rather than volume or weight. Thus, coal would be taxed somewhat more heavily than petroleum products, and much more than natural gas. Some proposed carbon taxes also account for the impact of other non-carbon greenhouse gases (e.g., methane) produced from fossil fuels, often using the relative global warming potential of a gas to determine the carbon dioxide content equivalent (CO2e) in metric tons (Sijm, 2002).

Proponents of a carbon tax contend that such a scheme would be much easier to implement administratively than a cap-and-trade scheme. Because the types of fuel and amounts purchased are precisely tracked by most industrial sources, it is argued that instituting a carbon tax would require little, if any, additional reporting and could be easily calculated. Moreover, existing revenue collection and enforcement mechanisms could be used in administering the tax.

In contrast, it's contended by carbon tax supporters that establishment of a cap-and-trade program is an extremely complex process, requiring rigorous new systems for compliance reporting, audits, and verification. The administrative simplicity of a carbon tax means that it could be implemented much more quickly in a country such as the United States—a critical consideration, as time is now of the essence in combating climate change. However, in 2006 the state of California was able to pass the Assembly Bill 32 (AB 32): Global Warming Solutions Act that establishes a statewide carbon emission level cap, calling for 1990 greenhouse gas emission levels to be reached by the year 2020 (Parry, 2007).

Opponents of a carbon tax question whether a carbon tax would necessarily prove to be more administratively simple. They point to the complexity of tax codes throughout the world and express concern that a carbon tax scheme could be laden with loopholes and exceptions that would render it far from simple to administer. The fact that tax rates might have to be adjusted from time to time would further increase administrative burdens. Proponents of a carbon tax argue that these taxes pose less potential for political manipulation and fraud. The protracted negotiations process for cap-and-trade systems provides ample opportunities for stakeholders to engage in rent-seeking activities to maximize their profits or market share, or to undercut competitors. Carbon tax supporters argue that this can undermine the integrity and efficiency of climate change ...