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ACCA Applied Knowledge · Business and Technology · Environmental and sustainability factors

A government introduces a carbon tax on each tonne of CO2 emitted by factories. Which statement best explains how this policy seeks to address environmental harm?

A carbon tax internalises the external cost of pollution by making the emitter pay per tonne of CO2, giving factories a financial incentive to reduce emissions. It is a charge, not a ban or a reporting rule.

  1. AIt bans all factories from operating, removing emissions entirely
  2. BIt internalises the external cost of pollution so emitters bear it and have an incentive to reduce emissionsCorrect
  3. CIt transfers the cost of pollution to consumers who live near the factories
  4. DIt requires factories to publish an annual sustainability report only

Explanation

A carbon tax is a market-based instrument that makes the polluter pay, internalising the externality and creating a financial incentive to cut emissions. It does not ban operations, does not target nearby residents, and is a charge rather than a disclosure requirement. Reporting is a different regulatory approach.

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