Carbon tax refers to the tax that is forced on the fuels’ carbon content (Gupta, 2007).The hydrocarbon fuel like natural gas, petroleum and coal has the huge amount of carbon content in it. Whenever they are burnt, they release a significant amount of carbon dioxide in atmosphere. Carbon taxes are introduced with the aim of reducing the greenhouse effect due to the gas emission through various cost effective means (Holler, 1991). However, the fact is that carbon taxes are quite regressive and impacts the low income group in society. The major impacts of carbon taxes must be addressed by implementing the tax revenue for the lower income groups. The main characteristics of carbon tax are (Nordhaus, 2007):
It is regulated in the form of direct tax on the increased content of carbon in fossil fuel.
It is very efficient and economical way of conveying the price signals that are significant for reducing the content of carbon in atmosphere.
It must be structured in a way so that the additional cost impact can be softened by passing it to general households.
Carbon tax is strongly supported by public officials, economists, environmental leaders and citizens.
The government policies related to carbon tax are vital for reducing the global climate changes. It is a positive and progressive step to fight the negative externalities.
This approach is quite common for adjusting the impacts of negative externalities. It is associated with the worldwide event “making of polluters day”. In this taxing policy, the private tax rate of production and consumption is increased so that due to the increased prices the demand for the product that is a factor of increased negative externalities are reduced (Robson, 2009). The best example for this is the tax imposed on vehicle entering on a busy route. The most common form of environmental taxes is vehicle excise duty, tax on usage of plastic bags, the landfill tax and the congestion charges.