Wikipedia defines a carbon tax as a direct tax on carbon dioxide emissions, which is generated as a byproduct of combustion of fossil fuels, among other processes. Expanding on this definition, a carbon tax can be seen as an excise tax on the sale of fossil fuels at a particular point in the manufacturing supply chain.



The amount of the excise tax would vary for different fossil fuels because it's based on the amount of carbon dioxide emitted by each fuel (which is a precisely known quantity) and would take the form of a fixed fee per ton of carbon dioxide emitted. For example, coal would have a higher tax rate per kilowatt (kWh) of energy produced than would natural gas for electricity generation. Similarly, diesel and gasoline prices would experience different increases because of their differing emissions per gallon.

The two major uncertainties regarding future carbon tax policies will be where in the fossil fuel supply chain the tax will be applied and what the precise amount per ton of carbon dioxide emitted will be. Based on past proposals, the risks and benefits can be high.

For example, one proposal advocated by the Carbon Tax Center favored applying the excise tax on the transaction between producers (oil wellheads, gas wellheads, coal mines) and their direct customers (refiners, pipelines, coal shippers). Another proposal favored applying the tax on the end sale to the consumer of the fossil fuel (homes and businesses that use electricity or drivers buying fuel for transportation).

How different countries decide on the amount of the tax itself shows considerable variation as well. Currently, Sweden has a tax of $150 per ton of carbon dioxide emitted. British Columbia is introducing a tax rate of $10 per ton of carbon dioxide emitted starting this month (July 2008).

Some proposals are making a case for a low tax initially, such as $25 per ton of carbon dioxide emitted that is then increased incrementally every year. Other proposals are suggesting the proper carbon tax of $30 per ton, representing a price that supposedly will account for the environmental costs due to carbon dioxide emissions.

It's important to keep in mind that a carbon tax will have an impact on the price of transporting goods from one destination to another. Consider that a tax of $100 per ton of carbon dioxide emitted will add $0.268 to the price of a gallon of gasoline and $0.305 to a gallon of diesel fuel, again based on information from the Carbon Tax Center.

At current fuel prices, this is a little more than a 5% increase in transportation fuel costs, something that consumers should keep in mind when making decisions about future vehicle purchases. For electricity usage, a carbon tax of $100 per ton of carbon dioxide emitted will mean an increase of $0.104 per kW-hr from coal, $0.087 per kW-hr from petroleum, and $0.057 per kW-hr from natural gas.

This is very large increase in the cost of electricity from fossil fuel sources, and these three sources comprise 70.5% of U.S. electricity generation. This means that if a carbon tax becomes law, you can expect and therefore must prepare for a rise in your electricity costs.

While there are no carbon tax proposals presently before Congress, carbon tax legislation is becoming an increasingly hot issue for green movement activists, as well as Congressional leadership. During the next presidential administration and the next Congress, it's highly likely that carbon tax legislation will be introduced and possibly enacted.

Thus, it's important to begin planning now to take into account the rising costs that such a tax will produce. An interesting side bar is that many carbon tax proposals claim to be revenue neutral. To this end, some proposals will feature decreases in individual and corporate income taxes paid for by taxes on the use of fossil fuels.

What this means is that those companies that move away from high-polluting fossil fuels the most depending on the exact implementation of the carbon tax might benefit from decreased tax rates, which could mean overall savings for some companies, depending on their specific energy needs.

What all this carbon tax debate is pointing to is the urgency to begin planning NOW for this "inevitability" to help protect your business from rising energy and transportation costs. One thing is certain! Congressional leadership is not going to be there for you.