A carbon tax is a fee for making users of fossil fuels pay for climate damage their fuel use imposes by releasing carbon dioxide into the atmosphere, and for motivating switches to clean energy. Because CO2 is released in strict proportion to the fuel’s carbon content, the carbon tax can be levied “upstream” on the fuel itself when it is extracted from the ground or imported into the U.S.
Carbon tax is shorthand for carbon dioxide tax or CO2 tax — or, one could say, for a carbon pollution tax.
The essence of every fossil fuel — coal, oil and gas — is its carbon and hydrogen atoms. Oxidizing (combusting) those atoms releases their heat energy but also converts carbon to carbon dioxide. Natural gas, with a high ratio of hydrogen to carbon, is the least carbon-intensive fuel, while coal is the opposite. The CO2 released from burning these fuels rises into the upper atmosphere and remains resident there — typically for around a century — trapping heat re-radiated from Earth’s surface and causing global warming and other harmful climate change.
The carbon content of every form of fossil fuel, from anthracite or lignite coal to heating oil and natural gas, is precisely known. A carbon tax obeys these proportions, taxing coal more heavily than petroleum products, and much more than natural gas. This makes a carbon tax simple to document and measure.
How is a carbon tax implemented?
Utilizing existing tax collection mechanisms, a carbon tax is paid “upstream,” i.e., at the point where fuels are extracted from the Earth and put into the stream of commerce, or imported into the U.S. Fuel suppliers and processors are free to pass along the cost of the tax to the extent that market conditions allow. Placing a tax on carbon gives consumers and producers a monetary incentive to reduce their carbon dioxide emissions.
Carbon that is chemically bound into manufactured products such as plastics but is not burned will not be taxed. Similarly, any CO2 from energy production that is permanently sequestered rather than released into the atmosphere won’t be taxed (or will receive an offsetting tax credit). Additionally, some carbon tax proposals include exemptions for export-dependent businesses to help them remain competitive in global markets.