Emission trade or carbon tax?

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Emission trade or carbon tax? is a page about the big picture of the international measures of climate change mitigation. The economic measures that have been suggested fall into two broad categories: emission trade systems where each polluter needs emission quota, which can be bought from emission markets. Carbon tax is a method to put tax on fuels and other products containing carbon. Both economic measures have good and bad properties. This assessment tries to understand when and how these measures should be used.

Cumulative carbon tax

This is a description of a hypothetical carbon tax.

  • The taxation system starts at a fixed time point, which is set into the near future (e.g. 1 Jan 2020) and is then permanent.
  • The tax is based on the cumulative carbon dioxide equivalent emissions emitted directly by the taxpayer since the start date.
  • Also LULUCF emissions are considered. Sinks reduce the emissions. Emissions of a taxpayer may be negative, which results in negative tax.
  • The cumulative emissions are estimated yearly based on the current best scientific knowledge for the whole period since the start date.
    • The estimate of historical emissions may change if knowledge changes. That may affect the tax of the current year but not previous years. This creates an incentive for a taxpayer to optimise emissions according to reality rather than a current artificial but official emission factor.
  • The amount of tax depends on the societal costs of the climate change. For example, if a forest fire causes costs to people, the compensations that the society decides to pay are collected from the tax.
    • Also indirect costs may be taxed: e.g. if a heat wave kills people, the societal costs of lost life are estimated and that amount is collected from taxpayers. However, the money are paid neither the the people who suffered (because they are dead) nor to their kin; instead, they are used as regular tax income to pay for state activities.
  • The actual practicability of the tax is not critical, because the idea is more useful as a thought experiment. It is an implementation of polluter-pays principle and can be used as an indicator in valuation questions. Realistic scenarios could be calculated and presented to people for asking about their preferences.
    • E.g. a person could be asked the amount of beef they eat yearly. Then, a question is formulated: "Your beef consumption is accumulating one ton worth of climate burden per year. This results in a payment of accumulating 50 dollars per year. In other words, next year your payment will be 50 dollars, the year after 100 dollars, then 150 dollars and so on until you stop eating beef, compensate for your emissions, or the carbon that you emitted is absorbed from the atmosphere in 2150. What do you want to do?"
  • Or: "The carbon emissions of this 150 g beef stake are 3 kg CO2e, and the current emission price is 33 € per ton so the carbon tax is 10 cents for the beef. However, the carbon dioxide stays in the atmosphere for 150 year, so you have to pay 10 cents for 150 years (the rest is deducted from your estate) or 15 € now. Of course, if climate change turns out to be worse than what we now anticipate, the tax collectors may come back to you anytine during the rest of your life. Do you want to eat the stake or not?"