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Definition

paying carbon the real price

The notion of pigovian tax, in which an ecotax is included, appeared at the beginning of the 20th century. Its principle is formulated by the english economist Arthur Cecil Pigou.

It consists in integrating the cost of damages (negative externalities) caused by the activity - the production or consumption - of an economic entity, that would otherwise have to be borne by the community. The damages are environmental in the case of an ecotax. It is for example all types of pollutions and in particular damages created by climate change, resulting of the emission of greenhouse gases.

Rationale

The carbon tax as well as all ecotaxes, is an instrument of economic policy based on the price of goods. Ecotaxes raise the cost of some goods and services, reducing demand for them. This is called a price signal. A carbon tax would correct the marginal cost of CO2 emissions and give an incentive to reduce carbon dioxide emissions by the whole economy. It consists of a payment for fuels directly based on their "carbon content" and the quantity of CO2 produced per unit of energy), this payment being made to the state or the authority in charge of collecting the tax. As the purpose of such a policy is to reduce carbon dioxide emissions, a carbon tax makes economic and environmental sense because it taxes the externality (production of CO2) directly. Coal generates the highest amount of emitted CO2 per energy unit, higher than petroleum and gas. Therefore it would be taxed proportionnally more, as well as petroleum compared to gas.

A tax has the advantage of being a universally shared "burden"  (which is not the case of emission permits, that can only be established for big entities such as firms or countries) and involves each consumer. The simplicity of deducting the taxes at source makes it a much easier and also more realistic system than negotiated emission permits especially when it comes to limiting the emissions of private individuals and diffuse emission sources in general, such as cars. A tax system concerns indeed all types of use of hydrocarbons, and it is certain that NEP cannot involve sectors like private transportation and services. The NEP system implies costs of functioning for transactions, for example the sums paid to the brokers and to the institutions in charge of finding the exchange partners for the involved entities. The costs of negociations must also be taken into account, as well as costs related to occurred delays. A tax, however, has much less costs at every level.

A tax has a dynamic effect, which a NEP doesn't have. It is a permanent incentive to reduce CO2 emissions. Technological, logistic, or organizational progress, and the extension of these improvements to the whole economy, lead to a reduction of the price for permits. The system cannot make any self-adjustment in response to such evolutions and as soon as abatement goals are more easily reached, demand for permits and its price falls. (In order to avoid that, only a tightening of the quotas granted can be made.)

The tax cannot be expected to create strategic behaviours from firms and NGOs that would harm the contractual frame of the market. NGOs or private entities opposed to the purchase of "rights to pollute" could massively buy permits so that their price rises. Firms could also act the same way to put their competitors under pressure. A tax is also less complicated to implement at least from a technical point of view, and in what is more: policymakers are more used to manipulating those policy instruments. Technical problems related to the necessity of taking in account carbon sinks, other greenhouse gases, the working out of technical agreements and their management, are a few of the problems that a tax system doesn't need us to cope with.


A tax system brings revenues that can be "recycled" to the economy. These could for example help reduce other taxes. This is often considered in the context of an ecological tax reform. The tax can be put up while reducing payroll taxes at the same time, which means with a constant amount of taxes. The aim is then to skip taxes progressively from values like work to noxious activity: pollution. There is evidence in that case of a positive redistribution effect. NEP can also generate income, but only if they are auctioned. It is important to remember that it is impossible to make the use of tax instruments general without any global authority responsible for that. However, this impossibility -which is often named as a disadvantage by tax detractors- is irrelevant. Any system that is to have a global effect, including the NEP, needs the existence and involvement of international institutions.