Carbon tax

Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more severe weather events. In this way, they are designed to reduce greenhouse gas emissions by increasing prices of the fossil fuels that emit them when burned.

This both decreases demand for goods and services that produce high emissions and incentivizes making them less carbon-intensive. In its simplest form, a carbon tax covers only CO2 emissions; however, it could also cover other greenhouse gases, such as methane or nitrous oxide, by taxing such emissions based on their CO2-equivalent global warming potential.

When a hydrocarbon fuel such as coal, petroleum, or natural gas is burned, most or all of its carbon is converted to CO2. Greenhouse gas emissions cause climate change, which damages the environment and human health.

This negative externality can be reduced by taxing carbon content at any point in the product cycle. Carbon taxes are thus a type of Pigovian tax.

Research shows that carbon taxes effectively reduce emissions. Many economists argue that carbon taxes are the most efficient (lowest cost) way to tackle climate change.

Seventy-seven countries and over 100 cities have committed to achieving net zero emissions by 2050.

As of 2019, carbon taxes have been implemented or scheduled for implementation in 25 countries, while 46 countries put some form of price on carbon, either through carbon taxes or emissions trading schemes.

On their own, carbon taxes are usually regressive, since lower-income households tend to spend a greater proportion of their income on emissions-heavy goods and services like transportation than higher-income households.

To make them more progressive, policymakers can try to redistribute the revenue generated from carbon taxes to low-income groups by lowering income taxes or offering rebates, then as part of the politics of climate change the overall policy initiative can be referred to as a carbon fee and dividend, rather than a tax. A carbon tax as well as carbon emission trading is used within the carbon price concept.

Two common economic alternatives to carbon taxes are tradable permits/credits and subsidies.