Carbon Taxes

Abstract

The design and implementation of taxes on carbon dioxide and other greenhouse gases (GHGs) are discussed. Carbon taxes are not currently used to any significant extent, but they provide one of the simplest methods of internalizing the costs of emission of greenhouse gases. After a survey of their current use, their design is discussed. Carbon taxes should be set equal to the marginal harm from a unit of emissions for each type of GHG. By imposing them upstream on extraction or refining of fossil fuels, all emissions from fossil fuels can be covered by a tax imposed on relatively few entities. Including other sources of emissions, such as deforestation or farming, would be more complex but, in many cases, it would be feasible. The distribution of carbon taxes when considering only the uses of carbon emissions is regressive, but once their effect on factor prices is considered, carbon taxes may be progressive.