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Any tax revenue can be recycled to reduce the punitive impact of carbon pricing on household budgets and business costs. Emission trading used in Europe, North America, China and New Zealand requires large emitters to buy or be given free allowances from governments to emit up to a limit.

Those with emissions in excess of the limit could invest to reduce emissions or, if cheaper, buy credits from those businesses with emissions lower than their limit. Emission trading systems also have two flaws – carbon prices are volatile and the system only applies to large companies, leaving other emitters exempt.

Thus carbon taxes are recommended to provide price certainty and be applied widely to smaller companies and households. Despite the appeal among policy elites for carbon taxation, carbon taxes do not satisfy the smell test for voters.

Why is this the case? Based on voter surveys around the world, the WIREs paper outlines five reasons as to why carbon taxation politically fails: (i) the levies are regressive, hitting lower income households most, (ii) voters are worried about competitiveness and employment effects, (iii) voters view the personal costs as too high, (iv) carbon taxes are believed to be ineffective in reducing emissions, and (v) governments can’t be trusted.

The first two criticisms in principle can be dealt with by offsetting policies such as grants or tax cuts. However, governments often limit support to low-income households leaving many with average income bearing high-energy costs. Further, business support is often targeted at political favourites as recently seen with the federal government announcement awarding higher limits to selective industries.