Regardless of how you may feel about climate change, it is probably useful to understand the issue of carbon taxes.
According to Wikipedia, a carbon tax is a tax levied on the carbon content of fuels and, like carbon emissions trading, is a form of carbon pricing. The term “carbon tax” is also used to refer to a carbon dioxide equivalent tax, the latter of which is quite similar but can be placed on any type of greenhouse gas or combination of greenhouse gasses, emitted by any economic sector.
Research shows that carbon taxes effectively reduce greenhouse gas emissions. Economists generally argue that carbon taxes are the most efficient and effective way to curb these emissions, with the least adverse effects on the economy.
Again, without taking a position on climate change, it is important for investors to note that carbon taxes make fossil fuels more expensive, imposing a harsher burden on those with low incomes. They are likely to pay a higher percentage of their income for necessities, such as gasoline, electricity and food.
It is also important to note that controlling greenhouse gas emissions is a global problem and the success of your efforts is materially dependent on your neighbor’s successes/failures; while tax policy is largely a national endeavor.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA