How Carbon Tax Works

The Logistics of Carbon Tax
Carbon tax usually gets passed down to consumers' electric bills.
Carbon tax usually gets passed down to consumers' electric bills.
© Photographer: Randy McKown | Agency: Dreamstime

The carbon content of oil, coal and gas varies. Proponents of a carbon tax want to encourage the use of efficient fuels. If all fuel types were taxed equally by weight or volume, there would be no incentive to use cleaner sources like natural gas over dirtier, cheaper ones like coal. To fairly reflect carbon content, the tax has to be based on Btu heat units -- something standardized and quantifiable -- instead of unrelated units like weight or volume.

Each fuel variety also has its own carbon content. Bituminous coal, for instance, contains considerably more carbon than lignite coal. Residual fuel oil contains more carbon than gasoline. Every fuel variety needs to have its own rate based on its Btu heat content.

Carbon tax can be levied at different points of production and consumption. Some taxes target the top of the supply chain -- the transaction between producers like coal mines and oil wellheads and suppliers like coal shippers and oil refiners. Some taxes affect distributors -- the oil companies and utilities. And other taxes charge consumers directly through electric bills. Different carbon taxes, both real and theoretical, support varying points of implementation.

The only carbon tax in the United States, a municipal tax in Boulder, Colo., taxes the consumers -- homeowners and businesses. People in Boulder pay a fee based on the number of kilowatt hours of electricity they use. Officials say the tax amounts to an annual addition of about $16 for homeowners' electric bills and $46 for business owners [source: New York Times].

Like Boulder, Sweden also taxes the consumption end. The national carbon tax charges homeowners a full rate and halves it for industry. Utilities are not charged at all. Since the majority of Swedish power consumption goes to heat, and because the tax exempts renewable energy sources like those derived from plants, the biofuel industry has blossomed since 1991.

Quebec will start a tax on petroleum, natural gas and coal in October 2007. Instead of taxing consumers, Quebec will tax the middlemen -- energy and oil companies. Even though the tax is toward the top end, companies can, and probably will, pass on some of the cost to consumers by charging more for energy.

It's easier to tax consumption than production. Consumers are more willing to pay the extra $16 a year for a carbon tax. Producers are usually not. Taxes on production can also be economically disruptive and make domestic energy more expensive than foreign imports. That's why existing carbon taxes target consumers, or, in the case of Quebec, energy and oil companies.

Carbon tax has a patchy history in the United States and around the world. It's widely accepted only in Northern Europe -- Denmark, Finland, the Netherlands, Norway, Poland and Sweden all tax carbon in some form. In the next section, we'll learn about the possibility of a national carbon tax.