This is where the carbon tax comes in. The carbon tax would impose an excise levy on fossil fuels that emit CO2 as a system to reduce greenhouse gas emissions. How the carbon tax would work is that it will put a monetary price on the cost of CO2 emissions on our economy. Since the carbon tax is a commodity tax, it would raise the price of energy and transportation. The burden of the tax would also fall more heavily on energy-intensive industries as well as lower-income households. However, revenue generated from the carbon tax could be used to offset the regressive impact or even cut taxes that reduce the incentives to work, save, and invest. This system would not only correct the current market failure that has resulted in increasing environmental damage, but also help firms and households shift to implementing alternative green technologies. This is because putting a price on carbon would have a range of implications for clean technology innovation, as well as raise the price of fossil fuels, pulling the demand from using fossil fuels to renewable green energy. This demand-pull can then incentivize greater levels of research and development into such green technologies …show more content…
Yes. A well designed cap and trade system and carbon tax both have the potential to cut emissions cost effectively in line with climate and energy objectives while offsetting the disproportionate impact of higher energy prices. However, with the cap and trade system, the price of carbon emissions may be more than the estimated benefits of carbon emission abatement. The cap and trade system would also be more difficult to implement, as there is the additional process of allocating a carbon emission allowance. Increasing the gasoline tax is also not as effective as the carbon tax. Since the gas tax is set by the government and based on the effects of gasoline use, it would only be efficient if it equaled the marginal damage of gasoline use. This is equal to the value of negative externalities resulted from gasoline use like pollution or traffic congestion. Also, unlike the carbon tax and cap and trade system, revenues from the gas tax could not be used to offset regressive impacts of raising the price of fossil fuels as revenues from the excise gas tax are currently accredited to building highways and managing roads. This would have to be changed. Raising the gas tax may lower fuel consumption, but provides no clear incentive for investing in green technologies. Overall the carbon tax would