A carbon tax is a fee for emitting a certain amount of carbon through the burning of fossil fuels and other industrial processes. Carbon taxes are one of two forms of carbon pricing, with the other being emissions trading systems (ETS). Mitigation and preventative strategies like carbon taxes and ETSs are vital to slowing and reversing climate change. On the global scale, carbon dioxide is the most prolific greenhouse gas. Of total global emissions, 65% alone is from carbon dioxide produced by burning fossil fuels and other industrial processes, while an additional 11% of greenhouse gases come from carbon dioxide emissions from forestry and other land uses, such as agriculture. This means that carbon dioxide comprises a massive 76% of global greenhouse gas emissions.
By attaching a cost to carbon, carbon pricing policies can help to discourage carbon emissions and therefore encourage the preservation of our environment. As of September 2021, 27 countries across the globe have implemented carbon taxes to help discourage the emission of carbon from burning fuels. These countries include the entire European Union, China, Mexico, and the UK, among others. While many countries have implemented carbon taxes, the fee structure varies from place to place. In the EU, for example, carbon costs €58 per ton (that’s equivalent to about $70) as of October 2021. Conversely, in South Africa, the carbon tax is much lower at R120 (about $8) per ton. There are an additional 64 subnational policies which have some degree of carbon fees, like carbon taxes and ETSs.
For some of these countries, carbon taxes have been resoundingly successful. Sweden has one of the world’s most effective carbon tax programs. Implemented in 1991, it was the second country to address greenhouse gases through a carbon tax (behind Finland). A significant element that helped to pass the carbon tax in Sweden was that the country had a long history of taxes to disincentivize behaviors and the use of non-renewable resources linked to climate change. Dating back to the 1950s, Sweden implemented “energiskatt” – taxes on coal and oil used for electricity.
When it was first implemented in 1991, the carbon tax rate in Sweden was SEK 250 (about $27). In 2021, the rate had risen to SEK 1200 (about $132). The tax has been beneficial for Sweden in a number of ways. First, from the inception of its carbon tax to 2018, Sweden’s greenhouse gas emissions have been reduced by 27%. Second, the tax has contributed revenues to the Swedish government, comprising about 1% of the government’s overall budget. While most of the revenue is slotted for general use by the government, some of it has been allocated for use to reduce the tax burden from other taxes, such as personal income tax. Using carbon tax revenues to offset costs for the general public can be an effective way to help stimulate the economy and reduce the individual household tax burden.
While Sweden has seen success with their carbon tax, in other countries, passing a carbon tax has proved more difficult. One major country that has yet to implement a carbon emissions tax strategy is the United States, who is the second largest country producer of greenhouse gases in the world (behind China), contributing about 15% of all global greenhouse gases. However, that does not mean that there have not been some efforts to reduce the emissions of greenhouse gases in the United States. Between 2000 and 2018, the United States had reduced its emissions by around 8%. While that lags behind the significant proportional reductions in countries like Sweden and France, it makes up a significant net reduction in global emissions. 8% of United States emissions translates to over 760 million metric tons of emissions reduced – almost the same as the reduction from all of the countries in the EU combined (770 million metric tons).
While the premise of a carbon tax seems like a good idea, in practice it has often been difficult to execute, especially in the United States. One of the major reasons for the difficulties in passing such legislation is that communities and governments highly weigh the negative economic impacts of the policy. In 2016, Obama tried to encourage legislation known as the Clean Power Plan that would create a carbon tax in the United States with the goal of reducing carbon emissions to 2005 levels by 2030 (around 32%). However, the plan failed to come to fruition. The major argument cited for the pushback against the bill was that it would have devastating impacts on the economies of states where fossil fuels were a significant industry, such as in West Virginia where coal is king and in Texas where oil dominates. The plan went to the Supreme Court after representatives from states like West Virginia and Texas argued that it violated their rights to state-by-state energy regulation and production. Ultimately, the Supreme Court ruled in favor of big energy in this case, with Supreme Court justices voting along party lines.
Further, lobbying on behalf of big energy undoubtedly played a part in the demise of the Clean Power Plan. Fossil fuel companies spend big bucks to lobby Congress and maintain their stronghold over U.S. energy production. Companies like Chevron, Exxon, and Tesoro, among others, spend nearly $115 million each yearon lobbying efforts aimed at obstructing climate regulation policies, like carbon taxes, to keep their influence and revenues high. In the particular case of the 2016 Clean Power Plan, the American Petroleum Institute (API), expressed its explicit dissatisfaction with the plan, in addition to clarifying its opposition to any regulatory measures at all, including carbon taxes but even including emissions targets.
Despite the setback from the ruling on the case of the Clean Power Plan and the continued pressures from fossil fuel companies anti-carbon tax lobbying efforts, the United States continues to introduce bills aimed at regulating carbon emissions. As of 2021, there are five carbon pricing bills in the 117th Congress. All of these bills have been suggested as carbon taxes, with proposed fees ranging from $15 per metric ton up to $59 per metric ton, each with annual suggested adjustments ranging from set dollar amounts around $10 to percentages between 5 and 6%, plus inflation. Most of the bills cover most or all greenhouse gas emissions, with one (the America Wins Act) more narrowly focused only on carbon dioxide emissions from energy-related production.
With many bills on the horizon and the proposed focus of the Biden presidency on addressing climate change, there may be hope for more carbon regulation in spite of ardent efforts by big energy to squash any regulation of their activities.