A carbon tax is a tax levied on the carbon emissions required to produce goods and services. Carbon taxes are intended to make visible the "hidden" social costs of carbon emissions, which are otherwise felt only in indirect ways like more severe weather events. In this way, they are designed to reduce carbon dioxide (CO
2) emissions by increasing prices. This both decreases demand for such goods and services and incentivizes efforts to make them less carbon-intensive. In its simplest form, a carbon tax covers only CO2 emissions; however, they can also cover other greenhouse gases, such as methane or nitrous oxide, by calculating their global warming potential relative to CO2. When a hydrocarbon fuel such as coal, petroleum, or natural gas is burnt, much of its carbon is converted to CO
2. Greenhouse gas emissions cause climate change, which damages the environment and human health. This negative externality can be reduced by taxing carbon content at any point in the product cycle. Carbon taxes are thus a type of Pigovian tax.
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Research shows that carbon taxes effectively reduce emissions. Many economists argue that carbon taxes are the most efficient (lowest cost) way to curb climate change. Seventy-seven countries and over 100 cities have committed to achieving net zero emissions by 2050. As of 2019[update], carbon taxes have been implemented or scheduled for implementation in 25 countries, while 46 countries put some form of price on carbon, either through carbon taxes or emissions trading schemes.
On their own, carbon taxes are usually regressive, since lower-income households tend to spend a greater proportion of their income on emissions-heavy goods and services like transportation than higher-income households. To make them more progressive, policymakers usually try to redistribute the revenue generated from carbon taxes to low-income groups by lowering income taxes or offering rebates, then as part of the politics of climate change they often call it not a tax but a carbon dividend.