CARBON TAX ECONOMIC THEORY

David Gordon Wilson first proposed a carbon tax in 1973. In economic theory, pollution is considered to be of negative effect (negative externality) on a party not directly involved in a transaction, resulting in to market failure.

A carbon tax is also an indirect tax—a tax on a transaction—as opposed to a direct tax, which taxes income. A carbon tax is called a price instrument , since it sets a price for carbon dioxide emissions.

Economic Theory of Carbon Tax
“Economists like to argue, about climate change as much as anything else. But on the biggest issue of all they nod in agreement, whatever their political persuasion. The best way to tackle climate change, they insist, is through a Global Carbon Tax.”— The Economist, 28 November 2015

A carbon tax is a form of pollution tax. Pollution taxes are often grouped with two other economic policy instruments: Tradable pollution permits/credits and subsidies. These three environmental economic policy instruments are built upon a foundation of a command and control regulation.

The difference is that classic command-penalty regulations stipulate, through performance or prescriptive standards, what each polluter is required to do to be in compliance with the law. Command and control regulation is not considered an economic instrument as it is typically enforced by narrower means such as stop or control order, though it may include an administrative monetary penalty in site-specific regulations.

The instrumental distinction between a tax and a command-and-control regulation is determined by the enacted legislative names, and whether they contain "tax" as a defined term within the Act, for example British Columbia's Carbon Tax Act versus Alberta's Specified Gas Emitters Regulations, Alta Reg 139/2007.

Prices of hydrocarbon fuels are expected to continue increasing as more countries industrialize and add to the demand on fuel supplies. In addition to creating incentives for energy conservation, a carbon tax would put renewable energy resources such as wind, solar and geothermal on a more competitive footing, stimulating their growth.