Question

Burning fossil fuels such as gasoline, coal, and heating oil releases gases containing carbon into the atmosphere. These “greenhouse” gases are widely believed to contribute to global warming. To reduce this problem and raise tax revenues, many environmentalists and political leaders have proposed levying a carbon tax on the carbon content in fossil fuels.

The first broad-based carbon taxes on fuels containing carbon (such as gasoline) were implemented in Finland and Sweden more than twenty years ago. Several European countries soon followed suit. However, as expected with the presence of a strong oil lobby, opposition to carbon taxes has limited adoption in the United States and Canada. The first North American carbon tax was not introduced until 2006 in Colorado, where it was applied to only electricity generation. In 2007 and 2008, the Canadian provinces of Quebec and British Columbia became the first provinces or states in North America to impose a broad-based carbon tax. Australia adopted a carbon tax in 2012. During the 2012-2013 U.S. federal government budget negotiations, several Congressional leaders called for carbon taxes to help balance the budget.

When governments impose carbon taxes on gasoline, managers of firms that sell gasoline need to think about how much of the tax they have to absorb and how much they can pass through to firms and consumers who buy gasoline. Similarly, managers of firms that purchase gasoline must consider how any pass-through charges will affect their costs of shipping, air travel, heating, and production. This pass-through analysis is critical in making short-run managerial decisions concerning how much to produce, whether to operate or shut down, and how to set prices and make long-run decisions such as whether to undertake capital investments.

Questions:

1. Besides the automobile industry, which other industries are likely to be impacted by the Carbon tax?

Answer 1