Carbon Tax - An Overview

This article briefly covers important points concerning the carbon tax. It explains the meaning of carbon tax, how the tax is imposed at different points of the supply chain, how the carbon taxes are not uniform for different types of fuels, the chronology of carbon tax in India and how this tax will help in reducing the climate change.

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What is Carbon Tax? 

It is a form of Pollution Tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. It is a cost-effective tool to reduce greenhouse gas emissions in the atmosphere. It is a kind of a Pigouvian tax ( tax on negative externalities). It is based on the ‘polluter pay’ principle. The ultimate goal of a carbon tax is to reduce and eventually eliminate the use of fossil fuels.

As as the latest update, the Carbon Monitor (An international collaboration of energy and climate specialists) has published data that mentions, “The world’s emissions of carbon dioxide from burning fossil fuels diminished by more than 1.6 billion metric tons in the first three quarters of 2020 from the same period in 2019, a decline of 6.3 percent.”

Know the difference between carbon tax and carbon price here.

Carbon Tax – How Does it Work?

The Government will set a price per ton on carbon. It gets translated into Tax on the following.

  1. Tax on electricity
  2. Tax on Natural Gas or Oil.

Different Fuels – Different Carbon Tax

The Carbon tax will not be the same for different fuels because the carbon content is not the same in all the fuels. The amount of carbon dioxide released is directly proportional to the fuel’s carbon content. Taxes on different fuels will be based on the British Thermal Unit (Btu) heat units. It won’t be based on weight or volume. This is done to encourage the use of efficient fuels.

Carbon Tax – Who Gets Taxed?

Carbon tax would be levied at different stages of consumption and production. Examples are listed below.


  1. Oil Wellheads
  2. Coal mines


  1. Shipping companies that transport coal.
  2. Oil refining companies


  1. Oil Marketing Companies
  2. Utilities


  1. Here the consumers will be charged directly through the imposition of higher electricity bills.

Carbon Tax – Reducing Climate Change

Due to the imposition of the carbon tax, it will make fuels more expensive. This will encourage utilities, businesses and individuals to 

  1. Fuel consumption will be reduced.
  2. Increase energy efficiency
  3. Alternative renewable sources of energy will become more competitive.
  4. All the above will lead to lowering the emission of greenhouse gases.

Which Countries have Carbon Tax?

As of 2019, 25 countries have implemented a carbon tax.

(Source: Wikipedia)

Carbon Tax – India

  1. India imposed a Carbon tax of Rs 50 per ton of coal produced and imported, in 2010.
  2. In 2014, it was increased to Rs 100.
  3. In 2015 it was further increased to Rs 200.
  4. Currently, the carbon tax is Rs 400 per ton.


Consider the following statements.

  1. Carbon tax is based on the polluter pay principle
  2. Carbon tax is Pigovian tax
  3. Finland is the first country to impose.

Which of the above is/are correct regarding carbon tax?

A) 2 only
B) 1, 2 only
C) 2, 3 only
D) All of the above

Answer: D

Carbon tax is designed to:

A) Remove the negative externalities of carbon emission

B) Instill uniform pricing on carbon emissions

C) Incentivize emission producers to invest in environment friendly practices

D) None of the abve

Answer: A

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Related Links:

Taxation in India Value-Added Tax (VAT)
Corporate Tax Goods and Services Tax (GST)
Angel Tax  Tax and Non-Tax Revenue
Tobin Tax Dividend Distribution Tax (DDT)
Minimum Alternate Tax (MAT) Securities Transaction Tax (STT)


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