Carbon taxes

There are several paths governments can take to price carbon, all leading to the same result. They begin to capture what are known as the external costs of carbon emissions and tie them to their sources through a price on carbon. A price on carbon helps shift the burden for the damage back to those who are responsible for it, and who can reduce it. Instead of dictating who should reduce emissions where and how, a carbon price gives an economic signal and polluters decide for themselves whether to discontinue their polluting activity, reduce emissions, or continue polluting and pay for it. In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society. The carbon price also stimulates clean technology and market innovation, fuelling new, low-carbon drivers of economic growth. There are two main types of carbon pricing: emissions trading systems ETS – or more commonly “cap and trade” – and carbon taxes. link



  • Overview of carbon taxing
  • Overview of carbon cap and trade
  • Effectiveness by countries

State and trends of carbon pricing – World Bank Review – October 2016  –  pdf

 Overview of carbon taxing

June 2018: Carbon pricing just makes so much sense. In a survey of 365 economists with climate expertise, 81% said that carbon pricing was the most efficient way to cut carbon pollution. The OECD similarly supported this assertion based on a study of 15 different countries and their policies to combat carbon pollution, concluding that “market-based approaches like taxes and trading systems consistently reduced CO2 at a lower cost than other instruments.” As an example, the four Canadian provinces with carbon pricing systems in place, led Canada in GDP growth in 2017. link As of 2017, 42 national and 25 subnational jurisdictions are pricing carbon. These jurisdictions are responsible for more than 22% of global emissions. The number of carbon pricing initiatives implemented or scheduled for implementation has almost doubled over the past 5 years, reaching 47 in 2017.

Carbon tax is a form of pollution tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas or oil. Because the tax makes using dirty fuels more­ expensive, it encourages utilities, businesses and individuals to reduce consumption and increase energy efficiency. Carbon tax also makes alternative energy more cost-competitive with cheaper, polluting fuels like coal, natural gas and oil. link

June 2017: $40 carbon price needed say experts. 42 countries either have a price on carbon or plan to implement one soon, but economists say  most aren’t high enough to keep global warming under 2 degrees. The new report says CO2 emissions will need to be priced at $40 to $80 per ton by 2020 to be high enough to change behaviors and shift investments away from high-emissions fossil fuels and toward cleaner energy. That rises to $50 to $100 per ton by 2030. Even then, the report says, governments may need to pair a carbon price with other policies, such as efficiency standards, to lower emissions fast enough to keep global temperature rise well below 2 degrees Celsius, the goal of the Paris climate agreement. link

April 2017: 19 countries, including Finland, Japan and Mexico, impose levies with prices ranging from less than $1 to $131 a metric ton of CO2 emitted. Australia had a carbon tax but changed its mind in 2014. link

How would a carbon tax be implemented

Overview of cap and trade

(April 2017) Cap and trade tries to efficiently limit emissions by putting market forces to work. The government starts by setting an overall cap on emissions, either for the overall economy or specific industries. It then gives or sells emission allowances to polluting businesses that represent the annual carbon limits they’re allowed to emit into the atmosphere. If companies take measures to be greener or more efficient, they can profit by selling extra credits left over. Companies that exceed pollution limits can buy additional allowances. About 41 nations around the world use these methods, including the European Union, China’s Shenzhen province, Canada’s Ontario and California in the U.S. The EU program is the biggest by traded volume. Some countries, including the U.K., use both cap and trade markets and taxes or price floors.
The cap-and-trade programs haven’t had a big impact on corporate behavior, but have encouraged some switching by utilities to cleaner natural gas from coal. That’s because the cost of pollution credits has been lower than expected – in the EU, the price has fallen more than 80% in the past decade to about 5 euros a metric ton. That’s about half the level needed to start biting in Germany. link 

July 2017: California extends Cap-and-Trade to 2030. California’s cap-and-trade program, the only one of its kind in the country and the second largest in the world, is the centerpiece of the state’s efforts to reduce carbon emissions. It was established by a 2006 law and launched in January 2013 to run through 2020, and a new vote extended the program through 2030, though some environmental groups are against the legislation. link

Effectiveness by countries


December 2017: China to launch nationwide carbon market. To be launched December 19, China will instantly overtake the EU’s carbon market to become the world’s largest. The power sector accounts for 46% of China’s CO2 emissions, of which an estimated 39% will be covered by the ETS, according to data from World Resource Institute.  link

European Union   

Since 2009, Europe has cleaved to its ETS which sets a cap on emissions and then allocates or sells polluting allowances to around 10,000 companies, which can sell, bank, trade or offset their unused credits. However, carbon prices have struggled to rise above 5 euros a tone due to waves of free allocations to heavy industry, intended to forestall their relocation abroad. The result has been a carbon price too low to trigger meaningful change. link

North America

October 2016: Prime Minister Justin Trudeau announced a national “floor price” on carbon that would require all provinces and territories to have some form of carbon pricing by 2018. British Columbia introduced a carbon tax in 2008 and it now stands at $30 a tonne, adding an extra 6.67 cents to each litre of gasoline. In August, the province said it would stick to that price until other jurisdictions catch up. Alberta announced last November it will have a $20-per-tonne carbon levy in place next year, rising to $30 a tonne in 2018.  link

June 2017: Exxon, BP and Shell back carbon tax proposal to curb emissions. The companies have revealed their support for the Climate Leadership Council, a group of senior Republican figures that propose a $40 fee on each ton of CO2 emitted as part of a “free-market, limited government” response to climate change. The fossil fuel companies announced their backing for the plan alongside other major firms including Unilever, PepsiCo, General Motors and Johnson & Johnson. link