An Overview of Carbon Taxation: The Transcript

An Overview of Carbon Taxation: The Transcript

On January 10th, 2019, we hosted our first webinar dedicated to environmental taxation.

Dr. Tatiana Falcão, a Policy Leaders Fellow at the School of Transnational Governance, European University Institute, Italy, offered us an in-depth look at carbon taxation, how it works, its advantages and disadvantages, and its current role in lowering carbon dioxide emissions as part of the UN’s Paris Agreement.

Tatiana covered plenty of questions, but if you have any additional ones you’d like to pose, please make sure to submit them below. I’m sure she’d be happy to answer a few more!


If you missed the webinar and would like to review what was said, go ahead and download the full transcript below.


For now, below are a few of the event’s main highlights.

What Is the Carbon Tax and How Does It Work?

Dr. Tatiana Falcão, a Policy Leaders Fellow at the European University Institute's (EUI) School of Transnational GovernanceTatiana: “I usually like to make a distinction between environmental taxes and environmentally related taxes. An environmental tax is one that has both an environmental purpose and an environmental effect. I mean that the tax is levied on an item of pollution; in the case of the carbon tax, it can be levied on carbon directly and is capable of generating a positive environmental effect. So by pricing carbon, you are automatically able to create a price distinction between the different types of by-products of carbon. So using fossil fuels as an example, by pricing a ton of fossil fuel, you are able to automatically create a distinction between its by-products. Let’s use diesel, gasoline and natural gas because these are natural by-products of crude oil. You can automatically create a price distinction because, by its own composition, diesel is more carbon intensive than gasoline and gasoline is more carbon intensive than natural gas. So merely by putting a price on carbon, you are able to create this automatic distinction that will automatically create economic incentives for people to acquire the less carbon-intensive product, in this case natural gas, and shift their behaviour in the long run and lead to a cleaner behaviour overall.”

“An environmentally related tax can be merely a revenue raiser because many countries use the term environmental tax to taxes that actually might have an environmental substrate but don’t necessarily have a positive environmental effect or even be levied on an item of significance of pollution. An example that I usually mention is a transport tax related to the ownership of a motor vehicle. It’s levied on an item that might lead to pollution; it’s a machine that might be polluting but it might not necessarily be actually related to its polluting abilities. So some of these user fees or transport taxes are related to the size of the vehicle, because they will be using the road system, so it’s a tax that will be used to maintain the infrastructure and it’s not necessarily correlated to its ability to produce pollution. It’s different from an ad valoremtax on the price of the final fossil fuel products to the extent that it’s related to the ability to pollute. Let’s say it’s a higher tax because it’s a bigger vehicle and it runs on diesel, then that’s different because you have the correlation between the ability to pollute and the size of the vehicle. But many of these taxes don’t have any correlation to the ability to pollute; they are just levied as a one-off user fee transport tax.”

What Countries Have a Carbon Tax and How Do They Differ? Have Some Proven to Be More Effective than Others?

Tatiana: “Effectiveness would depend on a few factors. First, of course, is the price that is levied or the price range. Quite a few countries adopt different prices depending on the use of the fossil fuel, whether the fossil fuel is used towards transport or domestic heating, for example.”

“The revenue destination is another factor: 1) whether the country employs the proceeds of the tax; 2) whether it recycles the proceeds of this tax and uses it to alleviate the burden on low income classes of society; 3) whether it employs the revenue towards the development of new technologies, and/or; 4) whether it just adds the general revenue to the general budget and it then gets to be employed in all the different classes of needs within the society and isn’t necessarily geared towards an environmental purpose.”

“Who’s the taxpayer is another factor. The EU also has the concomitant emissions trading scheme (ETS) that is the cap-and-trade scheme, which is amarket approach similar to the carbon tax but it’s different in the approach it adopts for pricing the carbon. A carbon tax is an ex-ante price on carbon, so the governments from day one decide that this is how much they want the carbon to be priced, whereas the cap-and-trade approach relies on a market approach, so it’s the market that decides what the price of carbon is going to be and the price will fluctuate depending on how interested the companies are in buying carbon permits. So it’s really like an open bidding structure where the price will fluctuate and the government doesn’t have any control over it… For many of the countries that do apply carbon tax in the EU, they exempt energy intensive industries from the scope of the carbon-taxing regime because they are already covered by the ETSscheme. So in order to not overly burden energy intensive businesses, they are excluded and, obviously, the compromise is the effectiveness of the tax because you are excluding the highest polluters in the industry.”

“It depends also on the objective of the policy intended by the government. So if the objective is to lead to an economic switch in renewable resources, then you have to analyse it against that goal, where you’d expect some of that revenue to be geared towards the development of new, renewable resources, in order to achieve that goal. If the objective is to reduce carbon emissions, then the policy obviously has to be measured against that goal and that’s an easier assessment to make.”

What would you describe to be “Best Practices” in the development of a carbon tax policy?

Tatiana: “Introducing the tax gradually would be the first point and have a plan to have increases over a protracted period of time… Another best practice would be to recycle revenues to create a system to compensate the lower classes from the burden of the tax. A carbon tax, like any other type of indirect tax is inherently a regressive tax, which means it burdens lower classes of society more than it does the rich... So you have to create a compensation mechanism to alleviate the low-income segments and women… Another issue that governments have to think about is whether to earmark the tax or not. This is a tricky question because many countries have constitutional limitations to earmarking revenues, so some of them won’t be able to do that because of their general legal framework. But it is important to define how the revenues will be employed… One lesson that you clearly get from the Nordic countries is transparency, so really openly communicating with the taxpayer, having an initial bill and submitting it to consultation from the industry, getting input, seeing what the effect will be before you go through with it and implement it… [Finally], eliminate any type of subsidy that you have on fossil fuel. That should have been my first point, but you know, the subsidy is the opposite of taxing, you’re actually providing stimulus for the consumer to behave in a certain way so you’re reducing the price for them to go to acquire the product.”

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