What is a carbon tax?

A carbon tax refers to a tax levied specifically on the carbon content of fossil fuels, with the primary goal of encouraging reductions in greenhouse gas emissions. This tax is intended to provide a financial incentive for businesses and individuals to reduce their carbon footprints by transitioning to cleaner energy sources or improving energy efficiency. By assigning a cost to carbon emissions, the carbon tax effectively reflects the environmental costs associated with carbon pollution, encouraging more sustainable practices and investment in renewable energy technologies.

This approach aligns with broader climate strategies aimed at reducing global warming impacts. It can influence consumer behavior by making carbon-intensive products more expensive when compared to alternatives with lower carbon emissions, promoting a shift toward greener options and innovations. The focus on carbon content emphasizes the relationship between fuel use and climate change, driving market participants to internalize the external costs of carbon emissions.

The other options do not accurately capture the essence of a carbon tax. A fee for air pollution caused by vehicles focuses on a specific type of pollution rather than targeting carbon emissions from a broad range of fossil fuels. A tax applied to renewable energy sources runs contrary to the objectives of promoting cleaner technologies. A penalty for exceeding carbon footprints implies a punitive measure rather than a market-driven approach that encourages overall reduction through economic signals.