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  • Writer's picturePok Thaitun

What is Carbon Tax?

Carbon tax is a policy instrument implemented by governments to reduce greenhouse gas emissions, particularly carbon dioxide (CO2), a major contributor to climate change. Its aim is to incentivize industries, businesses, and individuals to decrease their carbon footprint by imposing a financial cost on the carbon emissions produced throughout their business value chain. This is in line with the Paris Agreement goal of limiting temperature increases relative to the 1900 average to below 2 degrees Celsius.

Many countries are gradually adopting carbon tax policies to encourage businesses to become less carbon intensive and lower their carbon emissions relative to their business revenue. This can be achieved through various means, such as transitioning to renewable energy sources and optimizing supply chain logistics to operate in a more environmentally friendly manner. While this helps slow down global warming, it's undeniable that the instrument adds an additional financial burden to businesses, particularly those with high levels of carbon emissions, impacting their bottom-line profits.

According to the Stern-Stiglitz report (High-Level Commission on Carbon Prices 2017), intermediate estimates suggest carbon prices of $40-$80 per CO2 tonne emission in 2020 and $50-$100 per CO2 tonne in 2030 are necessary to achieve the goals of the Paris Agreement. The Bank for International Settlements (BIS) study indicates that carbon tax can reduce revenue margins by approximately 1% for businesses with a low carbon intensity (100 CO2 tonnes per $1 million of revenue), and unto 4 - 10% for businesses with a High carbon intensity (exceeding 1,000 CO2 tonnes per $1 million of revenue). This financial impact poses a significant risk for banks or lenders and is reflected in loan interest rates. Companies with lower carbon intensity receive lower interest rates, while high emitters face higher loan interest rates.

It is crucial for businesses to make necessary changes to their operations ahead of the implementation of carbon tax policies to minimize the financial impact. By reducing their emissions, organizations can lower their carbon tax liabilities and potentially save money. Implementing energy efficiency measures and transitioning to renewable energy sources can lead to reduced energy consumption and operational costs in the long run. Additionally, organizations may benefit from reputational advantages as consumers and investors increasingly prioritize environmentally responsible practices.

The overarching goal of carbon tax is to reduce greenhouse gas emissions and mitigate global warming. While the tax imposes financial burdens on businesses, it also encourages efficiency improvements to reduce carbon intensity. It stimulates innovation and the development of low-carbon technologies to meet the growing demand for cleaner energy sources and other solutions that improve business efficiency.

It's important to note that carbon tax is just one approach among various policy tools used to address climate change. Other strategies include cap-and-trade systems, renewable energy incentives, and regulatory standards. The choice of policy instrument depends on specific circumstances, political will, and the desired balance between environmental goals and economic considerations.

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