Question

Consider the following statement:

"Canada should introduce a national carbon tax. This would correct negative externalities associated with pollution AND bring the government a lot of revenue so that it could reduce or eliminate income taxes, which would help grow the economy by increasing the incentive for people to work."

Briefly comment on this idea. You can express your opinion, but don't forget, your answer should demonstrate some concepts that you've learned in this course.

Answer 1

A carbon tax is a carbon pricing mechanism where the carbon content of fossil fuel is taxed especially in the transport and production units. Many countries have imposed carbon taxes like Denmark, Ireland, India, and the UK. Sweden has a carbon tax of EUR110 and India has a carbon tax of Rs 400 per tonne, on the production and import of coal. Carbon tax increases the cost of production for firms hence reduces the output produced which reduces pollution and has been observed as the most effective way to curb climate change. It also forces firms and consumers to look for cleaner greener technology or renewable energy. Tax forms a huge source of revenue which can reduce its reliance on income tax hence reducing the IT rate. The fall in income tax will increase purchasing power and will also incentivize people to work hence inducing an increase in aggregate demand. Although carbon tax has its pro it has cons too as it doesn't help to limit or reach the emission targets like the emission trading scheme.