One of the methods governments use to control emissions and give sustainability a gentle (or not-so-gentle) nudge is through a carbon tax.  While it might sound like a modern-day buzzword, taxing emissions dates back to the 20th century, when the world first started realising that our planet is not an infinite trash can.

‍

In this article, we’ll take a deep dive into carbon taxation and other related concepts. We’ll also explore the impact of such a taxation system and whether it has managed to achieve its underlying goals. 

‍

Let’s break it down and see what’s what.

‍

What is a carbon tax?

Carbon tax (CO₂ tax) is the price tag on your greenhouse gas (GHG) emissions. Think of it as paying a toll for every tonne of carbon you send into the atmosphere. Depending on where you are, your local or national government might collect this tax from companies based on their carbon accounting (emissions produced) over a given period. 

‍

Typically, the biggest offenders - like power plants or logistics companies - end up paying the most. There are two ways they might get taxed:

• On the emissions produced by a company or 
• On the sale of products responsible for emissions

‍

Here’s a quick rundown of how this plays out: 

• Company A is in the business of extracting crude oils from offshore rigs. They get billed for every tonne of CO2 they churn out during this process. 
• Company B sells fossil fuel-based products like petrol and diesel. They pay up for every litre sold, with the tax aimed at curbing emissions linked to these products. 

‍

The main purpose of carbon-based taxation is to encourage companies to clean up their act. The more you pollute, the more you pay. Simple. And while nobody likes tax, this one is designed to push companies to adopt sustainable practices.

‍

Plus, a carbon tax has a nifty side effect: it nudges up the price of goods produced using fossil fuels, making them less appealing. This encourages everyone to start looking at more sustainable options. As of 2023, over 35 countries jumped on the carbon tax bandwagon, especially targeting the fossil fuel industry to help curb emissions.

‍

Now that we’re all clear on carbon tax, let’s get one more thing straight.

‍

Carbon tax vs. emissions trading systems

Carbon tax shouldn’t be confused with carbon emissions trading - though they’re like cousins in the world of carbon pricing. While both aim to cut emissions, the carbon tax is the simpler of the two: you pay a fixed price per tonne of GHG emissions, and there’s no cap on how much you can emit. It’s straightforward - no limits, just pay your dues. 

‍

On the flip side, a cap and trade emissions system slaps a limit on allowed emissions. If a company exceeds that cap, they have to buy carbon credits from companies that remained under their limit. So, while carbon tax fills up government coffers, emissions trading creates a marketplace for carbon allowances.  

‍

Carbon taxation in Europe

Europe, particularly the Nordic countries, has been at the forefront of carbon taxation for decades. Finland led the charge back in 1991, taxing fossil fuels before it was cool. Sweden, Norway, and Denmark weren’t far behind, all targeting fossil fuel industries to encourage companies and consumers to switch to clean energy. 

‍

Today, 20 countries in Europe have implemented a carbon tax. Some countries, including Germany, Austria, and Nordic countries, also implement energy tax as part or instead of carbon taxation. While carbon tax by country varies, most states apply it upstream – it’s levied on crude oil, coal, and natural gas extraction. The companies then pass on the price to the energy generation companies, who ultimately pass it on to consumers – talk about hand-me-downs. 

‍

As of 2023, Sweden and Liechtenstein boast the highest carbon tax rate in Europe, while Ukraine’s rates are scraping the bottom of the barrel. All European countries with a CO₂ tax also participate in the European Union’s Emissions Trading System (ETS), impacting industries across the region. Meanwhile, carbon taxes hit closer to home, affecting local industries according to each government’s rules. 

Is carbon tax effective?

Now, the million-dollar question: does carbon tax work?

‍

Economists and climate advocates have heralded carbon taxation as a solution to slash emissions. In theory, it should work by directly hitting the wallet, making emissions more expensive. It also gives governments a nice chunk of change that could be diverted towards rebates on eco-friendly consumption. In reality, though, its effectiveness is a bit more complicated - enter the messy world of politics. 

‍

There’s also the concern about carbon taxation disproportionately impacting the poorer segments of society as the cost of goods with a high carbon footprint gets passed down the chain. Ideally, some of the tax revenue would be reinvested to cushion these impacts, making carbon tax a double win for the environment and social equity.

‍

Carbon tax and its impact: The numbers game

Despite the complications, carbon taxation has shown promise. In Sweden, a case study on carbon taxes found that the country’s taxation reduced emissions from transportation by 6%. Over in the UK, a carbon tax on the energy sector contributed to a 20-26% reduction in emissions - a big win for the planet. 

‍‍

Notably, in contrast to carbon taxation in Nordic countries, the UK’s pricing on emissions was lower. Slowly but steadily, the taxation helped stave the energy sector off of coal, bringing its share in energy production to less than 3% as of 2022.

‍

Denmark has also seen a steady drop in GHG emissions, though it’s hard to pin down exactly how much is due to carbon tax alone, given their broad range of environmental policies. Dun fact: 60% of Denmark’s revenue from carbon tax goes towards lowering taxes on labour, while 40% is earmarked for environmental purposes. Good job, Denmark.

‍

Saving the planet: The carbon tax tango 

Carbon taxes are a popular tool in the fight to keep global temperature from skyrocketing above 2°C C by 2050. They’re particularly favoured in Europe, where many countries tax fossil fuel extraction, energy, and even transportation industries. Some even levy it alongside a cap and trade system to limit emissions. 

‍

While carbon taxation admittedly isn’t perfect, it’s a step in the right direction. Nordic countries like Sweden and Denmark have shown that with the right approach, a carbon tax can drive innovation and reduce fossil fuel reliance. 

‍

For governments, the key is to tailor carbon taxation to fit their unique circumstances and ensure the revenue is invested back into society to offset any disproportionate impacts.

‍

And remember, none of this works without accurate carbon accounting. If there is one thing we like at comundo, it’s accuracy in carbon accounting standards -  because when it comes to saving the planet, precision matters. 

‍

FAQs

Who made the carbon tax?

A carbon tax is imposed on emissions. It was first proposed by David Gordon Wilson, a British engineer and professor at the Massachusetts Institute of Technology, in 1973. 

‍

In 1990, Finland became the first country in the world to formulate a carbon tax, followed by other Nordic countries. Although the specific implementations of the carbon tax vary in scope and by country. 

‍

Who benefits most from a carbon tax?

Future generations, who will experience the impacts of climate change if not mitigated, are often considered to be the primary beneficiaries of a carbon tax. A CO₂ tax can help reduce emissions by discouraging the use of fossil fuels and incentivising the transition to renewable energy sources. 

‍

However, carbon taxes also benefit the government, which imposes them as a source of revenue. Still, many governments argue that such revenue is invested in climate initiatives. 

‍

Why net zero by 2050?

The goal of achieving net-zero greenhouse gas emissions by 2050 is a global target set to limit global warming to 1.5 degrees Celsius above pre-industrial levels. This target is based on scientific consensus that exceeding this threshold could lead to irreversible and catastrophic climate change impacts. 

‍

By reducing greenhouse gas emissions to zero, countries aim to stabilise the Earth's climate and avoid the worst consequences of climate change. 

‍

Which country has the best carbon tax?

A 2022 study by the Tax Foundation proposed a way to measure the success of carbon taxation in different countries by applying the c-efficiency ratio to carbon taxes. With this metric, it can track carbon taxes to their proposed outcomes. It found the Canadian Northwestern Territories, British Columbia, Luxembourg, and Japan to have the best c-efficiency ratios for carbon tax. 

‍

Getting hold of accurate energy and emission data for hundreds of stores across Europe is extremely time-consuming – and a lot of work. But to comply with CRSD, it's a must. Specsavers, for example, made the wise decision to leave the accurate energy data collection to us, so they could keep focus on continuing to provide the best optometry and audiology care for their customers.