One way to get people to generate less greenhouse gases is through the use of a carbon tax. A carbon tax is a tax on the carbon content of fossil fuels such as coal, natural gas and oil. The tax is imposed in order to raise revenue and encourage people to use less of these fuels which contribute to greenhouse gases in the atmosphere. Because so much carbon is used in affluent countries, even a fairly small tax could raise large amounts of money. These extra funds could then be used to reduce government deficits, reduce other taxes, improve the distribution of income within a nation, fund research and development into alternative fuels or help low-income countries raise their standard of living in an environmentally sound way.

The European Commission has proposed that a tax be levied on fuel that would depend on two factors: the amount of energy produced and the amount of carbon dioxide emitted when the fuel was burnt. In this way, it would take account of greenhouse emissions and energy efficiency. The tax would begin at $3 per barrel of oil or its equivalent, and would eventually rise to $10 by the year 2000. The commission has met with strong opposition from industry lobbies, and has been forced to grant exemptions to a number of energy-intensive industries such as steel, chemicals, glass and paper. Although the tax was endorsed by all member states in October 1991, it had not been implemented by May 1992. It was then put on hold until the USA and Japan could agree (Mackenzie 1992, p. 4).

In Australia, as in Europe, there are powerful groups opposed to such taxes being used. The Industry Commission argues that carbon taxes could have the following impacts:

• the tax imposed within Australia would lead to a reallocation of resources away from carbon producing and using industries to other industries, with an overall effect on GDP;
• the prices Australia receives for its exports and pays for imports could change because:
• the carbon taxes imposed by other countries would induce a worldwide reduction in real income which would cause a contraction in demand for Australia's exports, driving down their prices;
• the carbon taxes would shift export demands away from fuels and fuel-intensive manufactures, further decreasing export prices for these commodities; and
• carbon taxes in other countries may raise the price Australia has to pay when it imports items affected by those taxes. (1991, p. 110)

A study by London Economics, commissioned by BHP, CRA, Shell Australia, the Australian Mining Industry Council, the Australian Coal Association, the United Mineworkers Federation of Australia and others, claimed that a tax of $153 per tonne of carbon would be required to reduce carbon dioxide emissions by 20 per cent of 1988 levels by 2005. This tax, if applied only in Australia or in conjunction with other OECD countries, would mean the end of the steel and aluminium smelting industries in Australia by 2005, they said. Even a global tax of this order would see the end of the aluminium industry in Australia by 2005 and the steel industry some years later, unless every country applied the same level of tax ('Reducing carbon dioxide: All options would have profound effects' 1992).

A carbon or fuel tax would eventually cost householders more in direct costs of fuels such as petrol, and indirectly in the prices they pay for goods which require the use of fuel in their production and transport. The impact of these rising prices would vary regionally and within any one city. For example, states that use hydro-electric power to generate electricity (for example, Tasmania) rather than coal would be less affected by carbon taxes. Low-income families tend to spend a higher proportion of their total incomes on petrol. Consequently, those who need to use a motor vehicle to get to work, to take children to school and to go shopping will be worse off than more affluent families or those who live in areas that are well serviced by public transport.

People in rural areas and on the outskirts of cities will be worse off because of the longer distances they have to travel. And rural industries will also be badly hit because of the longer distances and the heavy fuel requirements of agricultural machinery. Similarly, increased energy costs aimed at encouraging people to use less energy by buying more energy-efficient appliances such as fridges, cars and light-globes may impact hardest on those who can least afford to replace such goods.

A carbon tax will only work as an incentive to use less carbon-producing fuel if there are alternatives available such as good public transport. Money collected from a carbon tax would best achieve the goal of decreased fuel usage if it was used to improve public transport. Equity considerations would require that such money was also used to improve the standard of living of those who would otherwise be disproportionately affected by the tax. However, a carbon tax, which is a seemingly simple and convenient economic mechanism, should not be used to avoid more direct and dependable measures such as legislation, urban planning and development controls, research and development into alternative technologies, and lifestyle changes.

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