Will Carbon Taxes Affect Consumers?

Written By Teacher: Teresa Pettitt-Kenney

Hi there! My name is Teresa and I just finished my Bachelor's degree in Environmental Science and am excited to pursue environmental education in the future! I am extremely passionate about climate change, equitable climate action, and how education can work to address these issues. 

Carbon taxes are important to learn about and understand in today's world, but they are not the easiest topic to explain or understand. Whether you’re teaching economics and government or environmental studies, jumping into issues like carbon taxes helps to engage your students with real-world, relevant issues. If you’re just getting started exploring carbon taxes in your classroom, utilize simple introductory resources like this comprehensive carbon tax video from ClimateScience. If you and your students want to dive deeper into the carbon tax issues and solutions, check out this Carbon Prices and Climate Change lesson plan from MIT Environmental Solutions Initiative that explores real-world government scenarios. Read more about carbon taxes below to prepare for upcoming questions and discussions in your classroom!

Written By: MIT Environmental Solutions Initiative

The MIT Climate Change Engagement Program, a part of MIT Climate HQ, provides the public with nonpartisan, easy-to-understand, and scientifically-grounded information on climate change and its solutions.

A carbon tax is an economic tool that would put a price on emitting carbon dioxide (CO2) into the air. “When I put a gallon of gas in my car, it's leading to 20 pounds of CO2 that go into the atmosphere that no one pays for,” says Christopher R. Knittel, George P. Schultz Professor of Applied Economics at MIT. “Part of the goal of carbon taxes is to have prices better reflect the social costs of those products.” Such a plan could charge companies a fee for every ton of CO2 they produce, which creates an incentive for them to switch to non-CO2-emitting energy sources like wind and solar.

But what’s to prevent those companies from continuing to burn fossil fuels and simply passing on the cost of the carbon tax to their customers? And if they do, then what would incentivize the polluters to use lower-carbon fuels?

In the short term, companies probably would pass on the cost of a tax, which means people would pay higher prices, says Knittel. This is especially true in places where demand is inflexible—an economist’s way of describing a situation in which people have few buying alternatives. Most people don’t have a choice about where they get the electricity for their homes, for example. Drivers have had few alternatives to pumping gasoline to power their cars, though electric vehicles are becoming a more mainstream technology.