The carbon tax is a tax on the emission of greenhouse gases, such as carbon dioxide. The tax burden is determined by units of carbon dioxide released. The more carbon dioxide a company releases into the atmosphere, the more money it must pay the government. The rates fluctuate based on the estimates of current damage by greenhouse gases and desired outcomes for lower emissions.
The goal of the carbon tax is to lower carbon emissions into the atmosphere and encourage businesses to look for low-carbon alternatives.
How does the tax impact manufacturers?
The carbon tax has challenged most manufacturers in the United States. The new price level is $43 per metric ton, increasing between three and five percent above inflation each year. This takes away from revenue made by manufacturing companies. They have two options: either pay the cost of this tax to keep operations as is, or they must search for alternatives.
There are many risks for companies now that this tax is in place, such as:
- Other options are costly and time-consuming.
- Manufacturers could lose competitiveness to other countries in the global economy without these laws.
Why might the tax not work?
According to Jason Hill, Department of Bioproducts and Biosystems Engineering, University of Minnesota, the increase in low-carbon alternatives may increase energy consumption rather than lower it. The reason for this is that the displacement of energy is not equivalent.
There is not a one-to-one ratio when looking at low-carbon alternatives, such as biofuel. To replace the gasoline needed to run machinery, you would need more biofuel than gasoline. For example, while biofuel has a lower carbon dioxide emission than gasoline, it emits an estimate of 80 percent of what petroleum-based fuel emits. This is because it takes 0.9 gallons of biofuel to equal a gallon of gas.
If you put this into a ratio:
Number of emissions for petroleum-based fuel versus the number of emissions for biofuel (100 + 1x = 0.9x + 80)
One hundred percent of petroleum-based fuel emits carbon dioxide into the atmosphere. Biofuel emits 80 percent of what petroleum-based fuel does, but you need additional biofuel to equal the amount of energy that petroleum-based power produces.
Looking at this equation, it appears that the amount of carbon dioxide produced is less than that of gasoline, even considering the additional fuel needed. However, that equation doesn’t include the cost of each fuel. The cost of a low-carbon fuel, such as biodiesel, is almost double that of petroleum-based power, such as gasoline. Therefore, companies would lose money when using low-carbon alternative energy.
There is also the concern that plants will avoid the carbon tax altogether and shut down, relocating to countries without regulations. Shutting down existing plants would harm the current economy, lowering the United States GDP.
How can companies be compliant to avoid penalties?
Companies can be compliant by switching to low-carbon alternatives. These alternatives include biofuel, hydro, wind and solar energies. Comparatively, they can pay the carbon tax for carbon dioxide emissions.
While there are organizations supporting the carbon tax, there are many manufacturers struggling to maintain compliancy while being competitive in today’s current economic climate. As 2022 comes to an end, manufacturers can only hope for more solutions.
Sources:
- Science Direct - Climate Consequences of Low-Carbon Fuels
- Center on Global Energy Policy
- Brookings
- Science Direct - The Impact of a Carbon Tax on Manufacturing
