Carbon tax (or carbon-dioxide tax) is the very simple concept of taxing every fossil fuel (i.e. coal, oil or gas) in proportion of the amount of the carbon-dioxide that gets in the air during combustion. This automatically serves as an incentive for the economy to reduce emissions as much as possible. Fossil energy sources are used in all areas of the economy so carbon tax has an impact on it as a whole. Carbon tax ‘punishes’ coal burning in particular as the amount of carbon-dioxide released during the combustion of coal is approximately two times higher than that of gas containing the same amount of energy. Oil is only 25 per cent ‘cleaner’ than coal in this respect.
Carbon tax is one of the most cost-efficient ways to fight climate change, especially if it does not increase the overall tax burden but replaces other forms of tax instead. Taxes that are levied on activities that have adverse social effects (so called negative externalities, e.g. environmental pollution), thus compensating society for the damages as well as incentivising the reduction of such activities are called Pigou-taxes. But you do not need to be a macroeconomist to recognise that it benefits the society as a whole if state revenues come from taxing fossil fuels rather than taxing, say, work. After all coal, oil and gas are destroying the climate and one day they will be depleted. One of the main causes of unemployment that poses a constant problem is that many people are not able to work because they could not produce the significant amount of taxes and contributions that are levied on work.
The idea of carbon tax already emerged in the seventies and has been analysed by researchers and demanded by activists ever since, however its use is spreading only in small steps worldwide. But now that climate crisis is really upon us, the world urgently needs a viable tool that can stop it.
We do not know exactly how much carbon tax is needed to stop the climate crisis, because it depends on other policy decisions and on what maximum warming we are willing to accept. If for example we wanted to achieve the goals set and accepted by the countries of the world in the Paris Agreement, i.e. to keep the global average temperature rise below 2 degrees Celsius relative to the temperature measured at the beginning of the industrial revolution, we would need a tax rate of 130 USD per ton at least, according to the Intergovernmental Panel on Climate Change (IPCC), but maybe an even much higher rate than that. If for example tomorrow we would introduce a 130 USD per ton carbon tax in Hungary, one liter of gasoline would be 21 per cent more expensive and one liter of diesel would cost 24 per cent more. This is not a small increase but it is not an unimaginable amount given that in Europe more than half of the price of gasoline are already taxes. With natural gas, the effect is more significant because the current level of its taxation is much lower. With a carbon tax rate of 130 USD per ton, household gas prices would triple.
Such carbon tax rates are barely to be found in the world. Although dozens of countries have explicit carbon tax, it reaches the ideal level calculated by IPCC only in Sweden, where it currently 139 USD per ton. Sweden is followed by Switzerland with 101 USD, Finland with 77 USD, Norway with 64 USD and France with 55 USD. There is no EU level, community carbon tax but the price of carbon-dioxide quotas used in the EU’s Emissions Trading Scheme (ETS) works as a kind of carbon tax and it was around 20 EUR per ton in the last year. There is carbon tax in many countries around the world, e.g. in China, Mexico, Columbia or even Ukraine but their unit (ton) value does not usually reach 10 USD which is equivalent to an approximate 2 per cent gasoline price increase. The spread of carbon tax is not unambiguous either: in France, carbon tax increase had to be revoked because of the yellow vest protests, and in Canada, the state of Alberta revoked its carbon tax introduced only a couple of years ago.
Thus the question arises what the issue is with carbon tax if it is such a good solution in theory but somehow cannot be implemented in real life. Let’s take a look at the difficulties:
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First of all, as they say ‘Only the old tax is good tax’. People do not like to pay taxes and find new taxes hard to take even if they agree with the purpose of them. Imposing a new tax can lead to demonstrations, riots, as we have seen in France in 2018, where the cause of the breakout of the protests was the gasoline price rise. Thus it is understandable that politicians are very careful with carbon taxes. Even though such a tax would benefit masses of people, the few that go out to protest can easily undermine the legitimacy of the leadership.
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Political power relations do not help carbon taxes either, because the oil, gas and carbon wealth and power generating assets generally concentrate in the hands of a few rich people or big companies that have much more lobbying power than workers. With their lobbying power they are able to prevent the state from transfer tax burdens from workers to natural resources.
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Furthermore, carbon tax is quite regressive in nature, i.e. the poorer someone is, the more burden it means for them. This is because poor people proportionately spend much more of their income on energy than the rich. The reception of carbon tax in Hungary would be problematic because many households’ heating is based on the relatively cheap but very pollutive liginte. The introduction of carbon tax would mean a heavy financial burden for poorer households that use lignite.
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An adequate carbon tax in addition rearranges the relations of competitiveness in the economy, making industries where energy prices make up a larger proportion of the price of their final product less competitive. Such industries are the steal or the cement industries. This process is on the one hand desirable because we want these products to be more expensive and being produced more efficiently. But this does not make it easier for politicians to handle consequences such as the closing of a steel factory resulting in steel being imported from China, produced with the same amount of carbon-dioxide instead. It is similarly problematic when miners lose their jobs because of the increase of coal prices.
With adequate policies and regulations, the above mentioned problems would be treatable. In the case of household energy consumption for example a progressive carbon tax could be introduced, i.e. with the increase of consumption, the tax rate could also be higher, taxing the bigger, rich consumers more. Another possibility would be the so called income neutral carbon tax, which, when introduced is accompanied by the decrease of another tax, e.g VAT, or we could simply redistribute the revenues gained from carbon tax to the population. Or we can promise our citizens to use the income from carbon tax for good causes, such as public transportation or the funding of renewable energy sources.
The effectiveness and credibility of such solutions is of course always uncertain. According to some studies, carbon taxes can be introduced in countries where citizens generally trust their governments more and the level of corruption is low. Where there conditions are missing, citizens will simply not believe promises about carbon tax.
It is also possible of course that the time for carbon tax has simply not yet come in many countries. An increase of energy price of 20-50 per cent is a serious burden, although it is nothing compared to the collapse of the civilisation and it is not unprecedented to happen in the aftermath of a larger economic crisis either. If these people come to understand that these steps are unfortunately necessary because we have to pay a high price for doing nothing and decision makers also recognise that carbon tax is a quite effective tool in achieving the goals set out in the Paris Agreement, carbon taxes would become politically possible. This can be backed up by the climate protests started in 2018.
But so far decision makers are in the situation that Jean-Claude Juncker put the following way back in 2007: ‘We all know what to do, we just don’t know how to get re-elected after we’ve done it.’
Guest post by István Bart, the director of Climate Strategy 2050 Institute
Read what Hungarians think about carbon tax and climate change in our other blog post.