Josephine V. Yam

Carbon Finance: To Trade or Tax?

There are a lot of features of a Carbon Tax that make it an effective economic-incentive approach to address climate change:

  1. Carbon taxes lend predictability to energy prices. This allows for strategic decision-making involving energy to be made will full awareness of the carbon–appropriate price signals, whether it is design of new electricity generating plants to the purchase of the family car.
  2. Carbon taxes will provide quicker results. The taxes themselves can be designed and adopted quickly and fairly.
  3. Carbon taxes are transparent and are easier to understand than Cap & Trade. The government simply imposes a tax per ton of carbon emitted, which is easily translated into a tax per kWh of electricity or gallon of gasoline.
  4. Carbon taxes address all sectors and activities producing carbon emissions. They target carbon emissions in all sectors such as energy, industry and transportation.

Indeed, the three-letter word called “tax” can spell political suicide for some governments, especially in the midst of this global financial crisis. Thus, some governments may not be bold enough to espouse it as a strategic policy tool to fight climate change.

Written: 2011 November
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