A carbon tax is a fee imposed by governments on carbon emissions from burning fossil fuels like coal, oil, and gas. The main goals of a carbon tax are to reduce greenhouse gas emissions cost-effectively and drive market innovation to find less carbon-intensive ways of producing energy and goods.
Carbon taxes make the environmental and social costs of emissions transparent by putting a price on carbon, rather than treating pollution as an externality. A carbon tax shifts the burden for the damage caused by emissions back to those who are responsible for them, as the prices of goods and services rise to reflect their carbon footprints.
Assessing the Global Landscape of Carbon Taxes
Current State
Carbon taxes have been gaining popularity over the last decade. As of 2021, 64 carbon pricing initiatives have been implemented or are scheduled around the world, covering 21.5% of global emissions. These include national and subnational carbon taxes, as well as emissions trading systems which put a cap on emissions and allow trading of emission permits.
The world's largest carbon pricing program is the European Union's Emissions Trading System (EU ETS), which covers around 40% of EU emissions. The highest national carbon taxes are in Sweden ($137/ton), Switzerland ($96/ton), and Finland ($70/ton).
Future Outlook
More countries are expected to adopt carbon pricing as part of their strategies to meet Paris Agreement climate targets. The World Bank estimates that to limit warming to 2°C, carbon prices must rise to $50-100/ton globally by 2030. This will likely involve both broadening country coverage and increasing carbon price levels.
The EU aims to expand its ETS to cover the maritime sector by 2023 and is considering including road transport and buildings. China is also piloting ETS programs in several provinces, leading up to a planned national system. Carbon pricing is gaining momentum in the Americas, with systems implemented in Canada, Colombia, Mexico, and parts of the US.
Sweden's Carbon Tax Success Story
Sweden instituted a carbon tax in 1991, becoming one of the first countries to put a price on carbon. It currently has the highest carbon tax rate in the world. Here's an overview of their influential system:
- Covers about 40% of the country's total greenhouse gas emissions. Applies to gasoline, diesel, fuel oil, natural gas, liquefied petroleum gas, and coal.
- Tax rate is ~$137/ton CO2, with regular increases over time.
- Revenue raised funds green tax-shifting, lowering taxes on income while increasing environmental taxes. This made the policy revenue-neutral overall.
- Between 1990-2017, Sweden's GDP grew 75% while emissions declined 26%. The carbon tax is credited with spurring this decoupling of economic growth from emissions.
- Public support remains high at around 70%, though protests have occurred against raising the tax on transport fuels. Exemptions for industry have limited coverage.
Overall, Sweden's long-running, robust carbon tax demonstrates that carbon pricing can achieve meaningful emissions reductions without harming economic growth if policy design considers competitiveness and public acceptance.
Carbon Taxes in Latin America
Many countries in Latin America have turned to carbon taxes as a way to reduce emissions while raising revenue. Here are some examples:
- Mexico instituted a national carbon tax in 2014. It covers fossil fuel sales and imports, with rates based on carbon content.
- In 2017, Chile implemented a carbon tax of $5/ton CO2 on large electricity generators. It will be ramped up to $20/ton by 2023.
- Colombia established a carbon tax in 2016, becoming the first Latin American nation with an economy-wide carbon price. Tax rates started at $5/ton CO2.
- Smaller programs also exist at the subnational level in Argentina and Brazil. Mexico City has a carbon tax on fossil fuel sales.
Revenue from Latin America's carbon taxes goes to both general funds and green spending. Chile and Colombia are using part of the revenue for environmental projects.
While Latin American carbon taxes remain modest compared to Europe, they represent a significant step for the region and can provide examples for other emerging economies to follow.
Carbon taxes are an economically efficient way of internalizing the costs of emissions and providing incentives across the economy to transition away from fossil fuels. Pricing carbon aligns private costs with social costs, encouraging producers and consumers to reduce emissions in order to save money. Carbon taxes also spur clean innovation, as rising carbon prices increase the relative competitiveness of low-carbon technologies.
While carbon taxes face political challenges, early adopters like Sweden and emerging programs in Latin America and Indonesia demonstrate they can be effective and viable policy tools. As more nations introduce carbon pricing policies, their environmental and economic impacts will become clearer. Taxes on emissions, as part of broader climate policy packages, will play a key role in driving the widespread decarbonization needed this century.
