Quo vadis carbon tax?
Carbon taxes represent a key part of humanity’s current strategy to avoid global warming above 2 degrees Celsius. They work by making carbon-intensive activities more expensive, thus encouraging individuals to reduce these activities. Given the existential threat climate change poses to our societies, one would hope that such a key policy tool was both effective and enjoyed broad public support. Neither of these things are true today. Why is that and what needs to change?
The carbon tax is a so-called steering tax. Its goal is to change people’s behaviour, not to raise revenue for the government. The current version of the carbon tax in place in most countries does not change people’s behaviour as effectively as it could and should. To see why, consider two frequently ignored facts.
First, rich people emit considerably more than the average person. Studies on socioenvironmental inequality estimate that the top 10% of emitters are responsible for about 50% of individual carbon emissions. Think of private jets, which emit up to 4.5 tons of CO2 equivalent (tCO2e) per hour, that is three times as much as the average human on the planet can emit per year if we want to meet our climate targets. Second, someone who falls in this category will usually not even bat an eye at a carbon price of, say, 100 Euros per tCO2e, let alone change their consumption habits. For context, the price of carbon in the European Union Emissions Trading System has oscillated around 80 Euros per tCO2e over the last three years.
Progressive carbon taxes are more effective
In light of these facts, a carbon tax that ignores socioenvironmental inequality and charges everyone the same will leave the low-hanging fruit in terms of carbon emission reduction on the tree. Those who emit the most, often by spending on luxury items, will contribute hardly anything to emission reduction.
A progressive carbon tax would change that. The basic idea is to have different carbon tax brackets based on individual emissions: everyone would pay a low carbon price for reasonable carbon use; for instance, on your first 1.5 tCO2e of emissions, you would pay 50 Euros per tCO2e. Beyond that, the tax rate goes up. For people whose emissions are above a certain threshold, e.g. more than 35 tCO2e or more than three times the emissions of the average European citizen, the price per ton in the top bracket might reach prohibitive levels in the tens or hundreds of thousands of Euros per ton. The precise thresholds and tax rates are up for discussion, but the general idea is clear enough.
Some countries successfully use this approach in other policy areas. For example, in Finland and Switzerland, traffic fines are based on income. To make rich people reduce their speed, speeding tickets can rise to six- or seven-figure sums. To make them reduce their carbon footprint, a similar logic applies.
You might think a progressive carbon tax is difficult to implement. After all, do we know how much a person emits? Fortunately, fairly reliable proxies for the two main categories of greenhouse gas emissions, transport and housing, are already available. Data exists on who owns or uses what aircraft, cars or boats, and we also have good proxies for the carbon-intensity of building and heating homes.
Current, flat carbon tax: by elites, for elites
Many countries are currently experiencing political pushback against standard, flat carbon taxes. For example, Canada has just abolished consumer carbon taxes at the federal level and in most provinces. At first sight, the political frustration might seem surprising, given that many low-income Canadians in fact came out ahead under the former policy thanks to a generous rebate structure. In British Columbia, for instance, individuals with an annual income below $41,071 automatically received a rebate of $504 per year.
So why the popular discontent with the tax? Misinformation about rebates as well as a poorly justified general sentiment against any form of taxation certainly play a role. However, here is another explanation whose importance is underestimated. When communities have a common goal, it matters for members of the community to feel that everyone is pulling their weight to achieve that goal. Today’s carbon tax fails this test. The burden of adjustment in terms of reducing emissions falls squarely on low-income individuals, whereas the wealthy just shrug it off and pay the tax. Moreover, the fact that some portion of today’s income and wealth inequalities are perceived as unjust to begin with adds insult to injury.
Against this background, resentment against the current, flat carbon taxes in most countries is not only surprising, it is also legitimate. Even when taking rebates into account, the policy is rightly perceived as a policy by elites, for elites. A progressive carbon tax remedies this shortcoming.
This article is a modified version of a post in the Conversation Canada and informed by a paper published in Nature Sustainability in 2024.
