Carbon Tax

A CARBON TAX is a market-based instrument (MBI) designed to reduce the severity of climate change. It does so by discouraging the use of energy sources that emit carbon dioxide (CO2) by making their use more expensive, through economic rather than government regulation. A carbon tax increases the price of CO2–emitting energy sources, making investments in cleaner, alternative energy generation a more competitive and financially attractive way of generating power.

Many countries around the world have introduced a carbon tax, including Denmark, Switzerland, Sweden, Norway, Holland, Finland, Austria, Italy, and Germany. The German government introduced a carbon tax in 1999 as part of a wider ecological policy initiative that aimed to reduce CO2 emissions, encourage investment in energy-efficient technology, and provide an economic boost to the German green-goods market. The revenue collected from the carbon tax in Germany has been used to reduce the pressure on other parts of the German economy by lowering the burden of income-related costs such as pension contributions. Socially, this has been particularly important for Germany. Since reunification in 1990, the German economy has endured long periods of recession and high levels of unemployment.

The European Union (EU) plans to introduce an industry-specific carbon tax on airlines in 2008 as [Page 212]part of a strategy to meet targets set by the Kyoto Protocol. Carbon dioxide pollution from aircraft presently accounts for 3 percent of the EU total, and in Britain (where there has been a rapid increase in the availability of cheap air fares), air travel is predicted to account for 25 percent of emissions by 2030.

The Tyndall Centre for Climate Change Research suggests that, unless the United Kingdom drastically reduces the amount of emissions caused by air travel, all householders, motorists, and businesses will have to reduce their CO2 pollution levels to zero. Otherwise, it is argued that the British government climate change targets will not be met. The EU hopes a carbon tax on airlines will increase the price of air travel sufficiently to discourage its use and encourage people to use alternative forms of transportation.