A carbon tax is a tax levied on the emission of carbon dioxide into the atmosphere. Carbon taxes are seen as a way to reduce carbon emissions by encouraging businesses and consumers to switch to less carbon-intensive products and services, and also to encourage investors to pursue ESG strategies. Revenue raised by carbon taxes can be used to reduce other taxes, fund infrastructure improvements, pay for alternative energy research and provide cash dividends to citizens. Many countries, states and cities around the world have implemented carbon taxes and the practice is growing, although so far no nationwide carbon tax has been implemented in the United States.
 
A carbon tax, also called a carbon fee, is an example of carbon pricing. The primary alternative approach to carbon pricing is cap and trade. This method puts a limit on the total quantity of carbon emitted per year. Emissions sources such as coal mines and power plants have to buy emissions permits on a market set up to trade the permits. Companies that emit less than their permitted amounts can sell their excess permits on the market.
 
The goal of carbon taxes and other carbon pricing techniques is to charge the sources of greenhouse gases for the damage caused by greenhouse effects such as climate change. Emitters get a financial motive to switch to alternative energy sources in order to avoid the cost of paying carbon taxes. Consumers are motivated to switch to products and services that produce less carbon, again because they cost less.
 
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