ABSTRACT
Taxing the carbon content of fossil fuels offers an efficient method of reducing emissions of carbon dioxide (CO 2 ), the most prevalent greenhouse gas (see Chapter 3 ). The effectiveness of the tax stems from the fact that it would increase the prices of goods and services based on the amount of CO 2 emissions associated with the production and use of them: Goods that lead to relatively high emissions, such as coal-fired electricity, would see larger price increases than goods that have relatively low emissions, such as services. Those changes in relative prices are essential to the success of the program because they provide incentives for businesses to produce goods in a manner that result in lower emissions and for households to reduce consumption of energy-intensive goods that cause high emissions.
