## What Is Carbon Taxation?

## Source details

**Canonical URL:** [What Is Carbon Taxation?](https://www.imf.org/-/media/files/publications/fandd/article/2019/june/what-is-carbon-taxation-basics.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fandd/article/2019/june/what-is-carbon-taxation-basics.pdf.md)
- [Structured JSON version](/-/media/files/publications/fandd/article/2019/june/what-is-carbon-taxation-basics.pdf.json)

---

### Overview
- Carbon taxes are levied on coal, oil products, and natural gas in proportion to their carbon content and can be collected from fuel suppliers.
- Without measures to reduce greenhouse gases, global temperatures are projected to rise by about 4°C above preindustrial levels by the end of the century; temperatures have already increased by 1°C.
- More than 50 carbon tax and emission trading systems now operate at the regional, national, and subnational levels; the global average carbon price is only $2 a ton.

### Rationale and Co‑benefits
- Carbon taxes provide incentives for producers and consumers to reduce energy use and shift to lower‑carbon fuels or renewable energy sources through higher prices for electricity, gasoline, heating oil, and related products and services.
- They reduce greenhouse gases (primarily CO2) and also generate immediate environmental and health benefits by reducing deaths from local air pollution.
- Carbon tax revenues can:
  - Counteract economic harm from higher fuel prices (for example, by lowering personal income and payroll taxes).
  - Fund productive investments to help achieve the United Nations Sustainable Development Goals, including reducing hunger, poverty, inequality, and environmental degradation.

### Administrative Appeal and Scope
- Carbon taxes are generally straightforward to administer because they can be piggybacked on existing fuel taxes or integrated into royalties for coal mining and oil and gas drilling.
- With emission‑monitoring capacity, carbon taxes can be applied to other greenhouse gas sources such as forestry, international transportation, cement manufacturing, and mining and drilling activities.
- Carbon taxes can play a key role in achieving countries’ pledges under the 2015 Paris Agreement; these commitments must be updated every five years.

### International Price Coordination
- A group of large‑emitting countries could agree to impose a minimum price on carbon (price floors) to guarantee mitigation effort and provide assurance against losses in competitiveness.
- Example: provinces and territories in Canada must phase in a minimum carbon price, rising to Can$50 (US$38) a metric ton by 2022.
- Advanced economies could accept more responsibility through a higher minimum price requirement; the regime could accommodate carbon taxes, emission trading systems, or other approaches.

### Domestic Political Economy and Policy Design
- Carbon taxes should be introduced gradually with targeted assistance for:
  - Low‑income households
  - Trade‑dependent industries
  - Vulnerable workers
- The rationale for reform and the use of revenues must be clearly communicated to the public.
- Complementary instruments may be needed; one politically promising approach is revenue‑neutral tax subsidies to promote cleaner power generation, cleaner vehicles, and energy efficiency improvements.

### Empirical Findings and Scenarios
- The chart compares reductions in projected fossil fuel CO2 emissions in 2030 below baseline levels implied by Paris pledges, alongside reductions from carbon taxes.
- Reduction scenarios shown:
  - Reduction resulting from a $35/ton carbon tax (green bars)
  - Extra reduction resulting from a $70/ton carbon tax
  - Paris Agreement CO2 reduction pledge (black squares)
- Key country observations:
  - A $35 a ton carbon tax would be particularly effective in reducing emissions in heavy coal users such as China, India, and South Africa; the tax would roughly double coal prices but would increase pump prices for road fuels only moderately.
  - Even a $70 a ton carbon tax falls short of what is needed in some cases, such as Canada and some European countries, reflecting more stringent pledges by these countries.
  - Countries such as Canada, France, Mexico, and Saudi Arabia made ambitious CO2 reduction pledges under the Paris Agreement; even with a $70 a ton carbon tax, these countries will fall short in achieving their pledged CO2 reductions.
- G20 Emissions Weighted Average and individual country percentage CO2 reduction below baseline in 2030 are displayed in the chart (percent scale from 0 to 45 percent CO2 reduction below baseline in 2030).

### Policy Implications and Recommendations
- Ministries of finance will need carefully crafted policy packages that:
  - Provide broader and stronger mitigation incentives
  - Account for national efficiency, distributional, and political economy considerations
- Given that the global average carbon price is only $2 a ton and that many pledges exceed what $35 or $70 a ton would achieve, there may be a case for international coordination (minimum carbon prices) and for advanced economies to accept greater mitigation responsibility.

*Ian Parry, "What Is Carbon Taxation?," Finance & Development, June 2019.*

---


_Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/june/what-is-carbon-taxation-basics.pdf_