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A carbon tax is grounded in the concept of the social cost of carbon. This is an estimate of the economic damage caused by emitting one tonne of COâ‚‚, including climate-related health, infrastructure and ecosystem impacts.

A carbon tax is typically levied per tonne of COâ‚‚ emitted. The tax can be applied either upstream (on fossil fuel producers) or downstream (on consumers or power generators). This makes carbon-intensive activities more expensive, it incentivises nations, businesses and people to reduce their emissions, while untaxed renewable energy becomes more competitively priced and appealing.

Carbon tax was first introduced by Finland in 1990. Since then, more than 39 jurisdictions have implemented similar schemes. , carbon pricing mechanisms (that’s both carbon taxes and emissions trading systems) now cover . The remaining 76% are not priced, mainly due to limited coverage in both sectors and geographical areas, plus persistent fossil fuel subsidies. Expanding coverage would require extending carbon pricing to sectors like agriculture and transport, phasing out fossil fuel subsidies and strengthening international governance.

What is carbon tax?

Sweden has one of the world’s highest carbon tax rates and has cut emissions by 33% since 1990 while . The policy worked because Sweden started early, applied the tax across many industries and maintained clear, consistent communication that kept the public on board.

Canada introduced a national carbon tax in 2019. In Canada, most of the revenue from carbon taxes is returned directly to households through annual rebates, making the scheme revenue-neutral for most families. However, despite its economic logic, inflation and rising fuel prices led to public discontent – especially as many citizens were unaware they were .

Carbon taxes face challenges including political resistance, fairness concerns and low public awareness. Their success depends on clear communication and visible reinvestment of revenues into climate or social goals.  that surveyed 40,000 people in 20 countries found that support for carbon taxes increases significantly when revenues are used for environmental infrastructure, rather than returned through tax rebates.

By Meilan Yan, associate professor and senior lecturer in financial economics, º£½ÇÉçÇø University

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