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Carbon Tax: effectiveness, applicability and fairness

Updated: Jan 27

Lately, the Carbon Tax has aroused as one of the most powerful means to tackle Climate Change, but some of the real implications of its characteristics had not been discussed in depth: how it may help to achieve the emissions goals, how to apply it to take the major profit of this policy, which criteria should be used to decide the price, and who should be affected by the tax.

What is a Carbon Tax?

Basically, a carbon tax is a fee imposed for the potential of emitting greenhouse gases (principally CO2). One of the most known type is a rate charged on the burning of carbon-based fuels (coal, oil, gas). Therefore, the most pollutant fuels will be those paying more. The main purpose of the carbon tax is to reduce and eventually eliminate the use of fossil fuels for the sake of stopping climate change. Ideally, the price charged should be at least high enough in order to achieve price parity with low-carbon energetic solutions, as nuclear and renewables. This policy is believed to be one way, if not the most effective, to reduce carbon emissions in a direct and easy way. Other mitigating policies According to the International Monetary Fund[1], alternative mitigation policies include:

  • ”Cap-and-trade”: emission trading system in which firms must hold an allowance for each ton of their emissions, and the government sets a cap on total allowances or emissions; market trading of allowances establishes the emissions price.

  • “Feebates”: which impose a sliding scale of fees on products and activities with above-average emission rates (per unit of energy or miles driven) and provide rebates (subsidies) on a sliding scale for products or activities with below-average emission rates.

  • Regulations: for example, standards for the emission rates of vehicles and power generators, or for the energy efficiency of electricity-using products, or minimum requirements for the use of renewables in power generation. Finally, there is another alternative postulated by Dan Miller[2] called Fee and Dividend, which has some difference which will be discussed later on.

Effectiveness Emissions reduction

According to the IFM, carbon pricing policies approaches seem to be the most promising to reduce carbon emissions. Furthermore, there is overwhelming agreement among economists that carbon taxes are the most efficient and effective way to curb climate change, with the least adverse effects on the economy. For example, a study in the American Economic Journal[3], found that Sweden’s carbon tax successfully reduced carbon dioxide emissions from transport by 11%. In addition, a 2015 study of carbon taxes in British Columbia found that the taxes reduced greenhouse gas emissions by 5–15% while having negligible overall economic effects. As can be seen in Figure 1, with the application of different levels of carbon taxes, many countries belonging to the G20 could achieve their goals according to the Paris pledge without further action.

Figure 1: Reduction in fossil fuel CO2 from carbon taxes in 2030, countries from G20 Going against consumption

Definitely, Carbon Tax seems to be the quickest and easiest way to have a strong impact immediately, as almost all of the technological developments which are under observation with high expectations still have many improvements to be done in order to be viable. For example, Carbon Capture and Storage (CCS) is being very promoted lately, but it has many drawbacks, starting from the point that it would encourage further emissions and that the security of the storage is not fully guaranteed.

Taking into account Charles C. Mann’s explanation about the positions of the Wizard and the Prophet[4], it appears that without pricing policies on emissions, every proposal would go in the direction of technological solutions (Wizards’ point of view). Therefore, Carbon Tax is key to strengthen the Prophet’s approach, in which it is absolutely necessary that we humans stop our consumerist behaviour. Then, Carbon Tax is the first solution that goes directly towards the root of the problem and it will be very effective because it strikes where it hurts most: our pockets.


How to implement a Carbon Tax? According to the Carbon Tax Center[5], the best way to tax fuels is to do it as far upstream as practicable, being this at the point where possession of the carbon-bearing fuel passes from the first producer to the next step on the supply chain (e.g., coal mine to coal shipper or utility, oil wellhead to oil refiner). This will minimize the number of points in the economy at which the tax would be levied. Moreover, it is always better that the tax should be applied to the energy contained in each fuel. Instead, a more familiar approach based on physical quantities of fuels would not be accurate, due to wide natural variations in carbon content within each fuel type, especially for coal types and petroleum derivatives. For example, a ton of lignite contains around 40% less carbon than a typical ton of bituminous coal, thus taxing the two respective tons at the same rate would be unfair. As it is the combustion of carbon into carbon dioxide that produces almost all the heat released by burning any type of coal, then the variations in carbon content of coals correspond highly proportional to variations in energy content. For instance, lignite and bituminous coal differ by only 5% on average in carbon content per million BTU. However, in this way, the carbon tax is being applied only to fuels, with the focus posed on carbon derivatives only, leaving many other emissions and sources without being taxed. As the Urban-Brookings Tax Policy Center[6] remarks, all greenhouse gases should be taxed. Therefore, different methods should be used to put rates on other GHG such as nitrous oxides, and from other sources rather than energy consumption. For example, the raising of cattle or the clearing of land also contribute to increase the amount of emissions. For both efficiency and fairness, a tax should apply as broadly as feasible to all greenhouse gas emissions, regardless of source. Unfortunately, that aspiration runs into four challenges: the difficulty of monitoring emissions, the multiple ways carbon emissions are created, the greenhouse gases other than carbon dioxide, and the need to give credit for efforts to capture carbon emissions or remove them from the atmosphere. Nevertheless, according to IMF, carbon dioxide emissions from fossil fuel combustion account for a dominant (63%) and growing share of global greenhouse gas emissions and are the most immediately practical to control. Thus, this should be the first priority.

International commerce Regarding the transactions among countries, in which double taxing should be avoided, an international standard should be developed to create parity. One first ideal possibility, although hardly applicable, could be applying the same tax worldwide. A second option is that each country compares, while importing fuels, their tax impositions against the exporter’s rates in order to charge or discount the difference. Then, for this control it is important that every type of fuel has its own tax rate.

An optimal mix of this solutions could be the base floor tax for every country suggested by the IMF, in which there is a fixed fee applicable in every country and then a variable component according to each country’s particular case. Rebates for CO2 Moreover, for any institution there should exist the opportunity for partial or total rebate of the tax payments if they are able to demonstrate that some or all of the carbon dioxide emission will be kept from entering Earth’s atmosphere for millennia. The Carbon Tax Center remarks that this rebate approach has several virtues:

  1. It provides the possibility to be exempt from taxes of unburned fuel. For instance, during coal combustion, some of it remains unburned in ash that may be returned to the mine for underground disposal. Moreover, plastic manufacturers may purchase petroleum derivatives as a raw material and pay the carbon tax, but as they don’t release emissions then no tax should be applied. Therefore, in this cases the tax should be not applied or at least refunded.

  2. It creates positive incentives to minimize emissions. Companies are keener on investing in efficiency solutions such as new technologies, methods, or fuels. For instance, CCS may arise as a possible alternative to pay less taxes (and of course to reduce emissions).

  3. It puts the burden on the fuel producer or middle players in the supply chain to demonstrate emissions avoidance. Therefore, using a clean source of energy provides not only a sustainable alternative, but also less control work and bureaucracy to demonstrate the avoidance.


Distribution of revenues At the national level, it is an issue of debate what should be done with the revenues of tax collection. For Dan Miller’s Fee and Dividend theory, the revenues should be distributed equally among every citizen. He supports that this will compensate the increase in prices of energy derived from carbon, but at the same time, that it will help develop cleaner solutions as people would have more to invest. However, this last fact may not be true, so another possibility could be that the revenues from the tax should be provided as subsidies to the stakeholders which are working on solutions that mitigate the emissions. This last point of view is aligned with the ”cap-to-trade” or ”feebates” policies, in which the evil guys pay the good guys. Although it seems that the second option helps accelerate even more the energy transition while giving the money directly to the game changers, Miller’s point of view has an interesting discussion on other social aspect. He says that as wealthy people use more CO2 due to their higher consumption behaviors, then his policy helps the low and middle classes to earn more than before, as they will receive equally distributed dividends while paying lower fees for their lower burning of fossil fuels. Then, this is another way in which the most pollutants pay the most ecological.

Historical burden Despite the fact that the carbon tax is being applied and discussed worldwide, there is an aspect of it that has never been discussed. There is certain recognition from part of high pollutant developed economies that they should pay more for their current elevated emissions, but still there is no retroactive tax due the historical emissions of each nation (this debate should also be considered in domestic and individual level, being the last the most difficult to estimate directly). For example, according to Prof. Mariano Marzo[7], the 19.5 million inhabitants of New York State consume in a year the same electricity (40 TWh) that 791 million people in sub-Saharan Africa. People from the first group represent only 2.47% of the second. And for sure, this phenom- ena might have been happening since many years ago (there might be some slight differences in numbers, but the scale comparison is probably the same). So then, we know that climate change is a direct consequence of the accumulation of GHG in the atmosphere, therefore history does matter. The CO2 emissions of several years before are a current burden for today’s citizens of the world. Thus, the question is: under what right can developed economies impose a policy to the rest of the world? Wouldn’t the current climate situation be better if we had all behaved as sub-Saharan people? So, are we really going to ask them to put taxes on their fossil fuels, because other countries have already polluted all of the world? This issue has not been discussed in depth yet, and it may not be convenient for the most powerful nations to talk about it, but as it is usual in history, it does not seem very fair.


[1]  International Monetary Fund (IMF). “Fiscal Monitor: How to Mitigate Climate Change”. In: (October 2019).

[2]  Dan Miller. A simple and smart way to fix climate change

[3]  Wikipedia the free encyclopedia. Carbon Tax.

[4]  Charles C. Mann. How will we survive when the population hits 10 billion?

[5]  Carbon Tax Center. Implementation

[6]  Eric Toder Donald Marron and Lydia Austin. “Taxing Carbon: What, Why and How”. In: Tax Policy Center, Urban Institute Brookings Institution (June 2015).

[7]  Mariano Marzo Carpio. “Reflections on the global energy transition”. In: UPC, Barcelona (September 2019).

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