What is a carbon tax? 

One of the most commonly used phrases when it comes to the climate change discussion is “carbon tax.” When we think of taxes, we usually think of old Uncle Sam reaching into our pockets for an ever-growing share of our income. 

A carbon tax could be just another tax levied by the government, but if set up the right way, it’s a fascinating and innovative way for one property owner to be compensated for the negative effects generated by another party.

Carbon Pricing for Emissions

Nearly all forms of manufacturing produce emissions or greenhouse gas as a byproduct of their operations. These can come in all sorts of forms from dangerous gasses that impact respiratory health, to the “greenhouse gasses'' such as carbon dioxide, methane and nitrous oxide. 

The greenhouse gas emission may not be acutely dangerous in an immediate sense, but most scientists agree that emissions and fossil fuel, along with other pollution over time they are having a negative impact on our environment by contributing to the phenomenon of climate change. 

Right now, carbon taxes generally only regulate greenhouse gas emission. Various state and federal agencies like the EPA usually regulate any emissions that are immediately harmful to people at or near manufacturing facilities. 

When greenhouse gas emissions are measured by a governmental agency, they can then be taxed. What becomes of the money? That depends on the way the laws are structured. The tax revenues might go into a fund to mitigate

the effects of climate change, or they could just be put in the large pot of all carbon tax revenue for other projects.

Using a Carbon Tax to Enforce Property Rights and Foster Emission Reduction

In the traditional sense, taxing emissions mostly results in a transfer of money from a pollution producer to the government. The government may make a lot of promises about what it’s going to do with the money, but after it’s filtered through layers of bureaucracy and grift, it may or may not do any actual social good.

But what if there was a more effective way to go about carbon pricing initiatives? What if this carbon tax were to be a direct transfer of money to the people most impacted by pollution? This is an emerging innovative way to view a carbon fee.

When it comes to pollution and CO 2 emissions producers, the regulations, emissions measurement and mitigation measures are never perfect. In fact, they can be highly deficient. It’s well known and documented that people who live in polluted areas may suffer all sorts of negative impacts from carbon leakage, and global warming is widely agreed to be a threat to the world at large. Asthma, cancer, developmental problems in children are often found near factories. There’s also the potential for mass property damage from acid rain, or private land being rendered unusable.

A carbon tax could be used to compensate property owners for damages caused by pollution generated by nearby factories and foster real climate action, instead of just random chatter by the congressional budget office.

One distinction that should be made is that there are situations where a company is acting irresponsibly, in bad faith, or illegally. In these situations, criminal and civil penalties would apply. Affected property owners would have legal standing to sue the polluters for the damage caused.

The carbon tax is intended for situations where factories are operating as clean and responsibly as they practically can. It compensates people for unavoidable impacts of manufacturing.

Paying For An Easement

A carbon fee or tax can be understood in the legal framework of an “easement.” An easement is a legal term for a situation where a property owner grants use of part of their property in return for valuable consideration or compensation.

For example: let’s say an internet provider wanted to run buried fiber optic cables under your property. They wouldn’t be able to come on your land and start digging. Instead, they’d have to negotiate with you, and agree on a price for the use of your land. Part of this agreement would likely include access for them to maintain the cables, subject to restrictions.

Now, imagine that a factory near your property emits smelly sulfur gas. Not only does it make working outdoors unpleasant, but it’s also possible to have detrimental health impacts. Since that factory has now diminished the value of your land, you should be compensated by a carbon pricing scheme.

As pollution frequently travels through the air it might not be just your property impacted, there might be many more affected downwind of the factory. The impacts will be less the farther away you get, until they are reduced to zero. A carbon tax would create a system where people could be compensated proportionally based on how much they are impacted.

Crafting An Ideal Carbon Tax

Though the general principle of compensating one party for the negative impacts created by another is fairly well established, crafting a just and efficient economic policy when it comes to climate change and renewable energy isn’t necessarily so easy. It’s helpful to first consider what the goals are of levying a carbon tax in this context?

First, the tax should incentivize a factory to pollute as little as possible. The cleaner their manufacturing method, the less tax they’d pay. When new technology comes along that allows for higher energy efficiency and less emissions, they’ll hopefully be more likely to adopt clean energy projects.

Second, the tax should compensate those affected by pollution and carbon dioxide emissions in a proportionate manner. If your property is adjacent to a manufacturer with harmful externalities, then you’ll receive money to address the harm. For example, let’s say you have a bee farm and produce honey. Due to the manufacturing next door, your bees are making less honey. You should be compensated.

The Downsides of a Carbon Tax:

While the goals of levying a carbon tax are laudable, there are definitely potential pitfalls. Innovation is often messy, so it will be fascinating to watch as all the kinks get worked out if carbon taxes become more common.

While the tax certainly incentivizes companies to operate as cleanly as possible, they are unlikely to achieve a 100% reduction in pollution and carbon leakage. When the tax is imposed, this represents an increased cost. This cost will then be passed on to their customers.

Even if the product they make isn’t directly sold to everyday consumers, the chain reaction will usually reach everyday people in the form of higher prices. This is what’s known as a regressive tax.

How well the incentive structure will work is up for debate. If the tax is extremely high and there are no alternative methods of production, you are just increasing their costs. On the other hand, if the tax is too low, then it may be cheaper to keep polluting and just pay the tax, rather than switch to a newer and more expensive method of manufacturing.

Unlike other taxes like income tax and property tax, a carbon tax could be set up in a way that is amenable to libertarians and those of us with a characteristically negative view of government in general.