Is a carbon tax a good policy to tackle climate change?

A carbon tax is a tax specifically levied on the carbon content of fuels. It is usually designed in terms of currency/tons of CO2, so it generates incentives to the reduction of carbon emissions in a Pigouvian sense. Given that carbon is present in hydrocarbons (coal, oil and natural gas), the economic sectors focused on the extraction and the use of these fuels are the directly affected economic activities. However, there are indirect and economy-wide effects through all the economic system. The objective of a carbon tax is to reduce the levels of CO2 emissions and then, internalize a negative externality (global warming and climate change). In this sense, the social benefits of this tax could overpass its costs. It is considered by many economists as one of the best cost-effective economic instruments to fight against climate change.


Although most countries apply taxes on energy products or motor vehicles to tackle emissions of pollutants related to global warming, some countries have implemented different forms of carbon taxes. In Europe we can find several countries: Finland (1990), Sweden (1991), Norway (1991), Denmark (1992), Latvia (1995), Slovenia (1997), United Kingdom (1998), Estonia (2000), Croatia (2007), Switzerland (2008), Iceland (2010), Ireland (2010), France (2014), Portugal (2014). Similar to an environmental tax reform, revenues from this tax can be used to cut other pre-existing taxes, and therefore, boost the economy, overcoming potential costs of its implementation and obtaining a double dividend: reduce emissions and improve the economy.


A potential revenue-neutral carbon tax is being modelled into the energy-environment-economy model developed for the METRES project, in order to specifically test the effect of different carbon tax rates. One objective of this is to know how to design an effective carbon tax in reducing carbon emissions with low or non-damage to the economic system.