Monday 11 July 2011

What is Carbon Tax and How does it Work?

Carbon taxes are a means to put a control on green house gas emissions. Emitters of greenhouse gases, especially from the industry, release large quantities of carbon dioxide that not only pollute the atmosphere but also result in global warming.

This threat to environment implies a social cost that humanity has to bear. 

In order to curb uncontrolled emissions by industry, governments often levy a charge on carbon emissions thrown into the atmosphere. This helps them to create funds that can be used to  help not only in development of low carbon technologies but also in bringing parity in unit prices of energy based on fossil-fuels and renewable sources. 

This enables investors and consumers to rationally evaluate the options in a holistic manner. 

The social and environmental costs that polluting industries induce in the absence of such regulations are called ‘negative’ externalities. These negative externalities must be absorbed into the cost of production to reflect the ‘real’ costs. 

Governments have, so far, largely ignored implementing such taxes to promote industry and make them competitive in local and global markets. However, of late, there has been strong public resentment over such acts of government.

Environmental awareness has gradually grown over the last few years and has started influencing political and business domains.

Carbon tax is a regressive tax, as it, severely affects the low-income groups. A carbon tax is most likely to increase the cost of food items and other basic products and services.

This impacts the livelihood of people with low income levels. Government plans to put carbon tax must be followed up by some form of subsidy to these low income communities to prevent them from going under the poverty line.

Also, it impacts the profits of industrial organizations. A reactive measure from corporate can result in job losses leaving more people unemployed.

Government plans must include safety measures to prevent job losses by extending rebates to corporate.

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