Definition of carbon tax:

The tax is levied by taxing on the carbon content of fossil fuels such as gas, coal and oil. This leads to decreasing consumption on fossil fuel and reducing the level of greenhouse gas emissions.

Policy’s Political Origin:

The United Kingdom began its Climate Change Levy in 2001. The time the policy implemented was 10 years behind compared to other northern European countries

Coverage/exempt:

The CCL(Climate Change Levy) is ‘downstream’. It “is paid by energy users not extractors or generators, is levied on industry only, with households and transport being exempt”.  Non-renewable forms of energy such as nuclear power is not included as a category of paying the tax, even though the proposed tax would be a combination of tax on the carbon content of fossil fuels, and a tax of all non-renewable forma of energy.

How do these policy implement over time?

Climate Change Levy (CCL) is taxing on categories such as electricity, natural gas supplied by a gas utility, liquefied petroleum gas or other gaseous hydrocarbons supplied in a liquid state for heating, and solid fuel (e.g., coal and coke, lignite, semi-coke of coal or lignite, and petroleum coke). CCL rates only apply to industrial and commercial energy supplies to the industrial, commercial, agricultural, public and service sectors The CCL was designed to encourage businesses to become more energy efficient and reduce GHG emissions.

A study showed that by 2010 the CCL help reduce energy demand by approximately 15% in the commercial and public sectors. As a result, industry does not have to pay higher taxes

Cost-Effectiveness of the policy:

Examining the effects of a carbon tax alone on GHG emissions would provide a more precise estimation of policy effectiveness. Many governments model the effects of a carbon tax acting alone during the implementation phase of the tax. A research shows that the Climate Change Levy would decrease energy consumption by approximately 15% in 2010. However, it is hard to estimate the true impact of tax itself in the real life. In general, one argument can be drawn. It is the CCL administrative ‘simplicity’. Since the tax is levied ‘downstream’ it is not possible to identify the fuel sources the roots of belongings.

Distributional effects of the policy:

In broad picture, there are three ways to distribute revenue from carbon taxes: “directed specifically to carbon mitigation programs, or directed to individuals through measures, such as reductions in income taxes, or used to supplement government budgets.”(1)

Climate change program returns tax revenue to customers through other means such as income tax reductions. These “revenue-neutral” mechanisms let customer behavior to change while reducing other taxes and it does not necessarily require government to spend extra budget for emission reduction programs. The “double dividend” theory suggests that revenue-neutral policies results in two benefits: a price is applied to fields that harm the environment and income taxes will decrease. A revenue-neutral approach can also lower the overall economic impacts of implementing a carbon tax.

As more details, Climate Change Levy is downstream rather than upstream, so the electricity generators who are in charge of paying the tax have no incentive to switch to cleaner. And the coverage is restricted to households.

Personal Opinion:

I thought Carbon tax is not effective before I research on it. It is due to substitution effect. Products like gas and oil do not have many substitute goods. So its demand curve is quite inelastic. So even though oil price is increasing due to tax, it does not affect to reduce the consumption and reduce greenhouse gas emission. However after I read few articles, I think UK’s Climate Change Levy proves that it helps to reduce greenhouse gas emissions. However, I think there are still drawbacks. The policy need to exempt not only households who are classified as low income, but also other electricity generators who need to pay tax per unit of electricity. If they are given incentives, they will concern of reducing carbon emission. Also I think Climate Change Levy is downstream. It has the ambiguity of belongings. I think in order to saving administrative costs, it is necessary to make clarify the right sectors to pay the tax.

References:

1. http://www.nrel.gov/docs/fy10osti/47312.pdf
2. http://eprints.ucl.ac.uk/17288/1/17288.pdf
3. http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=COM/ENV/EPOC/CTPA/CFA(2004)66/FINAL&docLanguage=En