What is a carbon tax?

A carbon tax is a tax that charges a certain amount of money based on the use of oil, coal, and other fossil fuels that emit carbon dioxide. The Carbon Border Adjustment Mechanism (CBAM), spearheaded by the European Union (EU) and the U.S. administration of President Joe Biden, has already made it impossible for companies to avoid carbon taxes. It is considered a de facto “carbon tax” because it collects carbon emissions from products such as steel, aluminum, cement, and fertilizer imported into the EU by imposing a carbon price linked to the EU Emissions Trading Scheme.

Why impose a carbon tax?

With the invention of LED lighting, it was thought that electricity use would decrease, but the lower prices have led to more electricity use. As with any good, the cheaper it is to use, the more it will be used. The imposition of carbon taxes is another example of an environmental protection scheme that takes this into account. When a carbon tax imposes a new expense that you didn’t have before, it’s natural to think about reducing your carbon footprint.

Governments can also use the carbon taxes they collect to fund green businesses, environmental investments, and climate change measures. In Germany, Sweden, and elsewhere, carbon taxes have been used to reduce the burden of social security contributions or to reduce income taxes and corporate taxes. In the EU, since the introduction of carbon pricing 18 years ago, emissions have fallen by 40% from pre-implementation levels, and revenues worth €175 billion have been generated.

Carbon taxes tied to corporate profitability

The RE100 campaign, the Carbon Border Adjustment Scheme, and more will require companies to pay a new form of “carbon tax” in the future. New expenditures are tied to a company’s profitability. If global carbon prices reach $100 per ton by 2030, companies in the Morgan Stanley Capital International (MSCI) World Index risk seeing their profits halved, according to Bloomberg.

Currently, global carbon prices are hovering around $40,000 ($30) per ton. However, if the European Union’s proposed carbon tax is fully implemented, the cost of carbon emissions to businesses could skyrocket, potentially reaching around 110,000 euros ($82) per ton.

■ When addressing climate change is a competitive advantage

With carbon taxes like the Carbon Border Adjustment Scheme, addressing the climate crisis is quickly becoming the new norm for global markets. In the future, companies will need to respond to the climate crisis to compete in the marketplace. Korea has many traditional manufacturing industries that have been slow to transition to energy.