Do carbon taxes work?

Carbon tax, just like any other tax is a price paid by the people or organizations or countries who emit carbon. The carbon tax can be avoided by switching to low-carbon technologies or offsetting the carbon generated. Certain industries such as consumer commodities or oil and gas will take time to be phased out or replaced by more sustainable options. A carbon tax is a policy that has been adopted by certain countries in the meantime to speed up the transition process and reduce emissions by putting an undeviating price on per ton of greenhouse gas emissions.

Description of the problem

A carbon tax is currently implemented in 27 countries and about 3 times more carbon pricing initiatives are in progress across the globe. The Climate Leadership Council also has a forum where economists from around the world can voice their agreeance to implementing a global carbon tax. Although recycling the revenue through a lump-sum payment may be effective in reducing public resistance to taxing carbon, empirical affirmation from real-world set is limited. Since its implementation in 2005, the EU ETS has seen a drop in emission by about 32% with projections of 41-48% as of 2030 and 55-62% as of 2040.

Carbon emissions prices were being set by carbon taxes and allow private agents to set emission reduction targets. Cap-and-trade and baseline-and-credit ETS are the two primary types. These permits are then traded, and market forces set carbon prices. Baselines for regulated emitters are set for baseline-and-credit ETS. Carbon prices can help cut emissions. An increase in price for carbon lowers the demand for carbon-intensive fuels and makes low-carbon energy more competitive.

Moreover, governments' strong commitment to increased carbon prices encourages investors to engage in low-carbon technology expansion and development. But the overall impact of these rules is unknown. Because the SCC (Social Cost of Carbon) curve is more likely to flatten than the MAC (Marginal Abatement Cost) curve, the error in selecting the price would be less than the inaccuracy in determining the amount that leads to choosing the optimal carbon prices. Assuming preferences for smooth consumption, permits are preferred over carbon taxes since they have a lower fixed price and a greater fixed quantity .

The results of the analysis show that:

- Reduction in carbon emissions is an expensive business that will deter the GDP growth in the current scenario, and it might increase by a few percentage points in the future.

- Carbon Taxes need to be implemented in very specific regions to facilitate emission reduction by about 20-50%, but alternatives need to be implemented such as optimal carbon pricing, carbon permits, subsidies, and such. As per (Kohlscheen, Moessner and Takats, 2021 ) a 1.3% of reduction in emissions per capita is observed with a $10 increase per ton of CO2.

Recommendations?

Recapitulating the facts, the policy brief concludes that carbon taxes can be beneficial in certain parts of the economy to reduce emissions significantly. It is also noticed that in certain areas, carbon taxes also prove disruptive to the economy . The recommendations that follow can be broadly bifurcated into international and domestic level carbon tax policies. At a national or domestic level, the carbon taxes work effectively in terms of behavioral economics, and it also creates incentives for the government to invest in low-carbon technologies. At an international level, a blanket carbon tax cannot be implemented since developing countries will be hit the hardest and may even be propelled farther into poverty.

However, certain governments impose taxes ranging from $1 to $121 per metric ton. Calculating the social cost of carbon is also important for addressing the issue of increasing carbon tax efficiency causing GDP and welfare losses. That necessitates a discount rate on investments, given the economic costs of CO2 emissions and the potential for disasters. Policymakers may consider income creation, specific emission reduction targets, or catastrophe insurance when determining a tax rate.

Hence, it would be advisory to implement tax schemes specific to areas and continue facilitating carbon pricing and trading at an international level to reduce the global emissions as a whole and achieve net-zero goals.??