A carbon tax is a tax levied on the carbon emissions from producing goods and services. Carbon taxes are intended to make visible the hidden social costs of carbon emissions. They are designed to reduce greenhouse gas emissions by essentially increasing the price of fossil fuels. This both decreases demand for goods and services that produce high emissions and incentivizes making them less carbon-intensive. When a fossil 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. This negative externality can be reduced by taxing carbon content at any point in the product cycle.
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 with carbon credits and subsidies. In its simplest form, a carbon tax covers only CO2 emissions. 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. Research shows that carbon taxes do often reduce emissions. Many economists argue that carbon taxes are the most efficient (lowest cost) way to tackle climate change. As of 2019, carbon taxes have either been implemented or are scheduled for implementation in 25 countries. 46 countries have put some form of price on carbon, either through carbon taxes or carbon emission trading schemes.
