18 Advantages and Disadvantages of the Carbon Tax

The carbon tax is a method of taxing pollution. It levies fess on the production or distribution of fossil fuels and the people or agencies who use them. Governments set a price per ton on carbon, which translates into taxes on oil, natural gas, and electricity. This process makes the dirtier fuels more expensive to use, encouraging everyone to reduce consumption, increase efficiencies, or transition to renewable energies.

A carbon tax also makes an alternative energy product more cost-competitive in the economy since fossil fuels become more expensive.

The advantages and disadvantages of the carbon tax are built on the economic principle of negative externalities. These are the costs that don’t get paid during consumption. If someone drives a vehicle to work using gasoline, then that person creates pollution that has societal costs since everyone suffers from its effects. This taxation process works to account for those behaviors.

List of the Advantages of the Carbon Tax

1. A carbon tax can provide economic benefits at the local level.
The first significant carbon tax implemented in North America was by the government of British Columbia. The policies went into effect in 2008. During the first seven years of implementation, real GDP growth in the province was 17%, while the net CO2 emissions in the region declined by 4.7%. About 70% of total greenhouse emissions were covered by the use or purchase of fuels under the structure of this policy. That means it is possible for economic gains to occur while reducing pollution.

2. If people don’t use fossil fuels, then they don’t pay the carbon tax.
Individuals and businesses can get out of a carbon tax by switching to a renewable or alternative fuel for your daily living needs. Although that is easier said than done for some populations, the goal of this tax is to reduce the amount of atmospheric pollution eventually.

When there is less CO2 being expelled to the atmosphere, then there are fewer pollution-related impacts to manage. The money raised from the tax can also help to develop clean-fuel technologies that reduce the effects of this policy on individual budgets.

3. It can produce multiple benefits that save consumers money.
Advocates support the idea of a carbon tax because it creates three potential benefits: a return to households in the form of a tax credit, access to cheaper, more efficient renewable energy solutions, and a reduction of CO2 in the atmosphere.

More jobs, better educational opportunities, a stronger infrastructure, and more availability for public goods are all possible when the benefits of a carbon tax start working together. It might cost a little more during the first years of implementation, but the long-term savings potential is an advantage that we cannot ignore.

4. A carbon tax encourages innovation in the alternative energy sector.
Businesses, individual consumers, and households are all urged to find more effective ways to use energy by motivating everyone to avoid the expenses of a carbon tax. Some people may walk to work or take their bicycles to avoid fuel costs. Commuters might look at the use of electric vehicles to prevent gasoline surcharges.

Instead of paying for carbon-based electricity, families could speak to their utility company about wind or solar energy options. A carbon tax does indeed ask people to make lifestyle changes or pay more if they choose to continue with their lifestyle habits, but it also helps to create a healthier planet.

5. The carbon tax can generate plenty of revenues for local governments.
When the Congressional Budget Office (CBO) looked at the possibility of a national carbon tax in 2011, it estimated that it would raise $120 billion in additional revenues for the U.S. government each year. That’s a lot of cash to funnel into the growth of renewable energy technologies.

Using British Columbia as an example, the government implemented changes to its carbon tax in 2018. The rate is now $35 per ton of CO2-equivalent emissions. Families then receive a “Climate Action Tax Credit” of $135 per adult and $40 per child to offset the added expense. In return, an increase of almost $0.08 per liter in gasoline costs occurred with the introductory tax rate, with natural gas and diesel charges also rising.

6. The CO2 tax encourages positive lifestyle changes.
When the carbon tax becomes active in a community, then utilities, individuals, and businesses will typically try to use fewer energy commodities derived from fossil fuels. Instead of commuting to work every day by driving there, someone might switch to public transportation. Homeowners might replace their incandescent light bulbs with LED options. Utility companies might implement gasification to reduce their emissions profile.

Since there is a definite price set on carbon with a CO2 tax, everyone receives a guaranteed return on efficiency investments that would be costly otherwise.

7. A carbon taxation policy is predictable in its outcomes.
When a CO2 tax uses a cap-and-trade scheme that fluctuates with changing economic conditions or weather patterns, then the price changes. The limit on emissions does not. That means there is stability in this approach because the final outcome is always predictable. If businesses know what the price of carbon is today and where it is headed for future investments, then it may become easier to see the value of alternative energy investment.

8. Each fossil fuel receives its own taxation rate.
A carbon tax can be levied at several different points in the production and consumption process. Since each fuel variety contains a unique amount of CO2 content, this approach takes into account the characteristics of every commodity. That makes it much easier for the financial responsibility of consumption to be linked directly to the decisions made to use fuels. Bituminous coal has much more carbon dioxide than lignite coal, so this advantage makes it possible to treat each variety

List of the Disadvantages of the Carbon Tax

1. The carbon tax creates an artificial economic market that isn’t always sustainable.
Many of the new carbon tax proposals use an emissions trading system as a primary form of income generation. CO2 taxes often apply when triggering thresholds get reached through mining, production, or fabrications activities. Every business receives an allowance by the government for the emissions they produce.

If an organization doesn’t reach their threshold, some CO2 tax plans allow the extra amount to be sold to more significant polluters, thus reducing their overall tax obligations. That doesn’t stop the responsibility of the consumer to pay the tax, which means companies come out ahead, and local households get left behind.

2. Companies shift their production processes to countries without a CO2 tax.
Carbon taxes of some type were active in over 60 national jurisdictions in 2017, representing about 15% of the greenhouse gas production on the planet. That means 85% of the CO2 discharges do not undergo taxation. When a state, province, or country decides to execute a new tax, the first thing businesses will do is look for alternative manufacturing solutions.

Many companies discover that it is more economical to do business somewhere a CO2 tax is not available, shifting jobs and resources away because of the outsourcing priority. That means consumers pay for the fees, but not the initial producers of the carbon dioxide.

3. The reduction of carbon dioxide is minimal.
Even the data from British Columbia shows that the impact of CO2 reduction from the carbon tax is minimal. The province achieved less than 5% improvement over an entire decade of implementation. The problem with a carbon tax is that almost no one uses any form of renewable energy regularly. Most alternative energy measures are either provided by or supplemented by carbon-based fuels. That means you’re going to be paying taxes on the carbon because the costs were passed along to you – even if you choose to use something sustainable.

Voters in Washington State recently turned down the idea of a CO2 tax for the second time. Even proponents of the measure admitted that the average cost of goods for consumers would rise by $400 per person if the legislation passed. For a family of six, that means $2,400 comes out of their budget.

4. Carbon taxes don’t require set prices because they focus on consumption only.
Residents in the Canadian province of Ottawa will pay over $1,000 extra each year to comply with the carbon tax laws implemented throughout the country. Even though advocates of this method of controlling greenhouse gas emissions often promote the idea that only the most significant polluters get targeted with this measure, it is always the end consumer who pays the final cost.

Buying gasoline for your car, turning on your heater, and other daily actions all pay a majority of the taxes instead of the companies producing the goods. Unless the government enforces a rule that doesn’t allow a business to shift the cost of a burden to the consumer, the expenses always get paid at the local level.

5. It takes time to fully implement the carbon tax.
Every new piece of legislation requires time to implement in a community at any level. If policies are approved today for a carbon tax, then it will be 3-5 years before the first fruits of that effort begin developing. That time is intended to help companies and consumers find ways to become compliant and save costs, but it can also have a reverse effect. This period of implementation can also encourage higher levels of pollution generation until restrictions become firm.

6. Businesses and consumers need time to consider the possible outcomes of CO2 taxes.
Even though British Columbia has enforced a CO2 tax for over a decade, it took over 8 years for the public to become in favor of the idea by a majority. Most people and companies are not happy about the idea of spending extra money when this idea is first proposed, which is why it can be challenging to implement it in the first place. There is a desire to know if the benefits of becoming more environmentally friendly are worth the initial expense.

Most people and companies find that the carbon tax is beneficial, but the first couple of years can be challenging. Once individuals and agencies figure out how to navigate through the policies, any ill feelings toward the project start to settle. Getting to that point can be a significant disadvantage.

7. Administrative costs aren’t always including in the CO2 tax proposals.
Even though a CO2 tax suggests the potential of billions in new revenues annually, it will create massive administrative costs to collect it. The overall purpose of a carbon tax is more about reaching targeted greenhouse gas emission priorities or penalizing those who use too many fossil fuels rather than raise money.

When the costs of competing with imports receive inclusion in the collection efforts of a CO2 tax, some positive effects are entirely eliminated.

8. The carbon tax could encourage more consumption instead of less.
When Republicans introduced a change in the distribution methods of a CO2 tax in the United States, they suggested the idea of offering households a tax credit instead of giving money to renewable energy producers. One idea proposed a $500 credit per person to offset costs, so a family of six would receive a $3,000 credit each year on their taxes.

With more credits potentially available as the carbon tax matures, the structure of this policy could stimulate consumption instead of restricting it. Families could calculate their overall cost of CO2 consumption and then use the tax credit to make money from their efforts. That’s why this policy must be carefully crafted. Poor implementation could result in more pollution.

9. A CO2 tax would make existing fossil fuels worthless.
The United States has mined enough coal already to supply an estimated four centuries of energy production at the country’s current consumption levels. Natural gas and oil stockpiles are also growing. There is a value to these resources right now because they are not being taxed.

If the CO2 tax is high enough, those combustibles will continue to sit instead of being used. The energy resources will start degrading until they reach a point where they are no longer useful. Renewables may make this disadvantage happen eventually, but it will generate a societal cost under taxation policies which must be paid somehow.

10. It may not be a useful approach.
When demand is low for fossil fuels, then the tax rate for carbon emissions must be notably high to produce positive results. It is the cost of the commodity that reduces demand levels. If consumers feel that the benefits of purchasing CO2 items outweigh the negatives of that behavior, then the government will make more money, while greenhouse emissions also rise.

The province of British Columbia is already failing to meet its reduction goals because of this disadvantage. The government there currently has the strictest carbon tax in the world, but they are still struggling to control emissions.


The advantages and disadvantages of the carbon tax look good on paper. It can be a challenge to implement policies that balance the needs of the environment with the budget of the average household. Unless strict rules are part of this idea to target producers as much as consumers, it is an idea that can struggle to receive approval.

If families are asked to pay more for their daily needs without holding companies responsible in the same way, then who is responsible for the carbon tax?

It is up to legislators to create a CO2 tax that encompasses the entire consumption approach instead of building loopholes into the system. There must be meaningful accountability at all levels of the supply chain for this idea to be useful. If these structures are not put in place during implementation, then the final result is closer to a sales tax or VAT than a useful opportunity to reduce pollution.

Author Biography
Keith Miller has over 25 years experience as a CEO and serial entrepreneur. As an entreprenuer, he has founded several multi-million dollar companies. As a writer, Keith's work has been mentioned in CIO Magazine, Workable, BizTech, and The Charlotte Observer. If you have any questions about the content of this blog post, then please send our content editing team a message here.