Carbon taxation is one of the most promising policy instruments for reducing greenhouse gas emissions


“I am just a drop, the rain said before the flood.”

In this bigger picture of climate change and action people, feel that their individual choices and effort do not affect the environment. Since most of these impacts happen too slowly or too far away for us to see, most of us think we cannot do much about them.  Research says that it is not the case. For example, if we turn up our AC temperature and reduce our thermostat temperature by just 1oC, we save up to 1530 kWh/year per household and 360kg CO2/year [1,2].

Many people don’t see a significant risk from rising temperatures. So, putting a price on it, to them, seems like an expensive government program without a clear goal. Some companies and governments are trying to increase awareness by introducing Personal Carbon Credits or quotas. United Kingdom created a personal carbon-trading scheme for all citizens. It is the single best instrument to encourage every man, woman, and child in the country to make a low-carbon choice every day. This is just not a way in to cash in and make business, it is a way to monitor and improve our behaviour.

Behavioural change can be stimulated at an individual level or catalysed by an external factor. To look into the changes induced at an personal level, look at the studies from the “Cool Climate Network” (CCN) by Renewable and Appropriate Energy Laboratory (RAEL). CCN’s  projects and publications for over a decade (2005-2015) reveal some encouraging results. The studies show that competition has become an increasingly popular strategy to engage individuals in energy and resource conservation. One of their projects, “Sustainable Connections’ Community Energy Challenge” has achieved 21% average savings in each year of its competition during the program period. CCN has published over 20 high impact research studies and developed many tools like the Cool Climate Calculator and Green Home Calculator to estimate your carbon footprint and take actions. CCN has also been pivotal in assisting to design climate change policies in the state.

Despite these positive results they couldn’t be converted into a policy tool because of difficulties in calculating rewards and incentivising climate friendly practices of the consumer. So, innovative ideas like the Personal Carbon trading policy in the United Kingdom, or the recent high technology solutions like ECO-coin, (a new cryptocurrency which aims to reward people for carrying out sustainable actions) have only remained as an academic thought experiment.

The recent IPCC report published in October-2018, mentions that, countries are generally on track to achieve the targets pledged in the Paris Agreement. Although this is sufficient to slow the projected rise in global energy-related CO2 emissions, the current trends are not enough to limit Global warming to less than 1.5° C by 2040 due to increasing energy demand.

Time and again history have proved that when provided with an external push, despite the initial rebellion, we humans, adjust our habits and course progressively. The shrinking hole in the ozone layer provides the inspiring hope that positive changes are possible if humans act. Just two years after the hole in the Ozone layer was discovered, the world jumped quickly to solve the problem. Several nations signed the Montreal Protocol, and now, two decades later, the ozone hole is measured to be at the smallest since 1988.

Now it is the time to take radical measures like taxing carbon and a heavy-handed legislation to implement it thoroughly. We need to cut carbon pollution as much as possible, as fast as possible. The developed economies have to be progressive and take lead in implementation of carbon tax and invest in developing countries and show the world the way forward. 40 countries and more than 20 cities, states and provinces already use carbon pricing mechanisms, with more planning to implement them in the future.

A carbon tax is a way of applying the 'polluter pays' principle, a type of “Pigouvian tax”, similar to cigarette or liquor taxes, which are collected to compensate for the expenses those products impose on the rest of us. Economic theory builds on the idea that if the environmental and social costs are not included in the price of externalities they induce, hence emitting carbon has become too cheap. Carbon must therefore be priced correctly — i.e., at the true “social cost of carbon”.

Under a progressive government, Australia implemented a carbon tax on large emitters in 2012 of $23 AUD per ton of CO2 equivalent. In 2015, Alberta set a climate plan that included a carbon tax. Both taxes were subsequently revoked entirely. Improper implementation, populist rage and climate change denialist rhetoric has made this initiative unpopular.

Northern Europe has been progressive about it in the whole world, Finland and Sweden for example have implemented it in the early 90’s and it has not hampered their economy in the long run. In fact, they have only grown. In Sweden, a Carbon tax was introduced as a part of the energy reform in 1991. While the Swedish economy grew by 60% since the introduction of the Swedish carbon tax in 1991, carbon emissions decreased by 25%.

In 2008, the Canadian province, British Columbia implemented a carbon tax. The revenue returned to citizens through lower income taxes, proving that it is possible to reduce emissions while growing the economy. Between 2007 and 2015, provincial real GDP grew more than 17%, while net emissions declined by 4.7%. The result is British Columbia enjoys the lowest taxes in Canada.

So, what makes the Carbon tax work well for some economies and quite unpopular in others? Public perception of carbon pricing reforms and general trust in politicians are the main factors in determining the success of Carbon taxes. (Mattauch, 2016) explained the reasons from political science and behavioural economics point of view in a study as below.

Ambitious carbon pricing is often correlated with high political trust and low corruption levels. This is exemplified by Finland, Norway, Sweden and Switzerland, which all exit high levels of trust. Success stories such as that of Sweden – which currently has the highest carbon price in the world at 140 €/tCO2 – demonstrate that it is indeed possible to make carbon pricing work. They implemented a carbon tax, the economy didn't collapse (or even take notice), and the citizens are happy with the system.

A carbon tax can lower greenhouse gas emissions, but it needs to be as high as 45 €/tCO2 . to create an impact. (Rhodium Group). A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or depending on the carbon content of fossil fuels. In addition to the Cap and trade or Emission Trading schemes (ETS) already in place, the carbon tax must be introduced to fill the gaps.  ETS provides only the incentive to reduce emissions, not the means.

The Costs of Climate damages are higher than the costs of reducing greenhouse gas emissions. Its effects intensify and prolong storms, droughts, wildfires, and floods. When we put a price on carbon in the marketplace, consumers see the costs associated with it and adjust their consumption in an informed manner. 
I believe that the most elegant way to drive innovation and to reduce carbon emissions is to put a price on it. This Carbon taxes will foster innovations and businesses will prosper in this 10-20 year, Scientists will design new hybrid vehicles, device new sources of energy and businesses will be built around them.

The Carbon Tax centre supports this policy saying that “This single policy change—explicitly using prices within existing markets to shift investment and behaviour across all sectors—offers greater potential to combat global warming than any other policy, with minimal regulatory and enforcement costs”

A carbon tax is, in and of itself, somewhat regressive. It affects the poor more than the rich as they spend a larger percentage of their income on energy services. The most important driver of whether a carbon tax will be progressive or regressive is how the revenue is returned to households.  New revenues generated from increasing the carbon tax can be used to reducing payroll taxes, encourage new green initiatives and providing per capita household rebates (like in Canada).

In a nutshell, the macroeconomic effect of a carbon tax varies depending on what the government does with the revenue.  To me, Carbon taxes are an important part of the portfolio and supports, funds, and accelerates the effects of those other policies (which is great!), but not a substitute to Cap and trade systems and regulations. It must be certainly supplemented with policies for Efficiency standards, energy transition assistance, technology research, development, and pollution regulations.

Appropriate pricing and policy design have to be debated and scientists have to take the lead in helping economists to design this policy. For enhanced public acceptance, behavioural and political science perspective must be adopted while designing the carbon pricing schemes. With fervent political attention, and cognizance a carbon tax, must be implemented. Climate change is the challenge of our time but it’s one uniquely suited to our capability.


By Sai Sri Harsha Pallerlamudi

Published on 06th September 2019


Additional References 

[1] I. C. Jason Palmer, "United Kingdom Housing Energy Fact File," UK Department of Energy and Climate change, Cambridge,2013. 

[2] Edward Vine and Christopher M. Jones. A Review of Energy Reduction Competitions: What Have We  Learned? Report prepared for the California Public Utilities Commission. 2015. 167 pp. 

[3] T. W. B. I. IDA, "Pricing Carbon," 2018. [Online]. Available: carbon. [Accessed 12 Dec 2018]. 

[4] "British Columbia's Carbon Tax," [Online]. Available: change/planning-and-action/carbon-tax. [Accessed 29 Nov 2018]. 

[5] F. F. a. L. Mattauch, "Our World in Data," 2016. [Online]. Available: popular#note-14. [Accessed 04 December 2018]. 

[6] D. Roberts, "The 5 most important questions about carbon taxes, answered," 2018. [Online]. Available: economy. [Accessed 25 Nov 2018].

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