A Pigovian tax, also known as a carbon tax, is a tax imposed on companies that pollute the environment and create negative externalities. It is considered the most efficient way to correct negative externalities caused by pollution. However, there is debate around what size tax is appropriate and how to quantify the external costs of emissions. Alternatives to a carbon tax include increasing corporate average fuel efficiency standards or implementing a cap-and-trade system of carbon allowances.
2. Carbon Tax = Pigovian Tax
When a market creates negative
externalities
Carbon Tax is a tax set upon companies
that pollute the environment
Most efficient way to correct the negative
externalities
3. Criticism
What size tax is appropriate?
Tax = external cost of emission
but not concensus on size of external cost
Actions
must be taken today to avoid
outcomes that will occur in the future
4. Alternatives
CAFE
Standards: Corporate Average Fuel
Company
Increasing fuel efficiency of cars
Cap-and-trade system
Allowances are bought and sold
5. Outcome
Global carbon tax is easier to negotiate
Raising of global revenue
