State of the art in carbon taxes: a review of the global conclusions

Abstract

Carbon taxes have been advocated as a key economic measure for the reduction of greenhouse gas emissions. The basis of this proposition, is the economic theory that applying a tax on carbon dioxide emissions is the “optimal” solution to addressing the market failure of externalities. In moving from theory to practice, the evidence from comprehensive global assessments, over the last three decades, covering actual policy experience and empirical study of policy effects, requires evolution and refinement of the theory. Carbon taxes are not adopted at the scale, coverage or price level necessary to effectively reduce emissions in line with the Paris Agreement. A persistent “implementation gap” has arisen, largely due to the political and social challenges that accompany taxation. Assessments of policy experience in key sectors of built environment, transport and industry, highlight the critical role of regulation, standards and technology among broader policy programmes. While a carbon tax can provide simplicity and scope, it is not sufficient on its own. Consistent with this finding, recent modelling innovations show that taxes can be employed as part of a portfolio of best practice policies and measures, for deep reduction of emissions. Portfolios can facilitate application of a lower, more “moderate” carbon tax, which enhances the social acceptability and political feasibility of the tax itself. When designing a tax, revenue recycling can help with policy resistance, delivering the “double dividend” of economic and climate gains, and addressing distributional considerations. A carbon tax may be useful to complement the broader portfolio of policies and measures accepted as necessary for long-term transition and transformation. It can offer support and prevent rebounds, but is not a substitute for the fundamental systems change that is at the core of addressing urgent sustainability crises.