Carbon tax: yes or no?

We have been hearing about carbon tax for years now. There are those who praise it and those who believe it would be an impediment to economic growth and employment. There are countries that adopted it long ago, others that have done it recently or will do it soon, and some others that seem not to have any intention of applying it. But what is it really about and what does it mean? Is it really useful for reducing CO2 emissions in a desperate attempt to save the planet? And yet, what consequences would it have on a country’s economy? Let’s try to shed some light.

Carbon tax is an economic and financial tool designed by economists to combat CO2 emissions and slow global warming. It is a tax that can be defined as “Pigouvian” since it is assessed against activities that have adverse side effects, and which is applied to those who produce carbon dioxide in the atmosphere. Basically, the government establishes a fixed rate which is then imposed on every ton of CO2 emitted. All this is obviously to discourage the use of fuels in favor of more ecological solutions, such as renewable energy.

The first country who adopted it was Finland in 1990, followed by Sweden and Norway in 1991 and Denmark in 1992. In fact, Northern Europe countries have long been among the countries that produce the least greenhouse gases in the world, with percentages between 45% and 55%. According to data from the World Bank, in some of the aforementioned countries, a ton of CO2 costs 60 dollars in Norway, 77 dollars in Finland and 127 dollars in Sweden. 

In addition to the carbon tax, there are other initiatives with the same objective, among these there are emissions trading such as the Emissions Trading Scheme adopted by the European Union. On the World Bank website there is a Carbon Pricing Dashboard that reports in real time the number of carbon pricing initiatives and the countries involved. There are currently 63 initiatives, of which 46 are national laws and 35 concern local administrations. One of the last countries to have joined the carbon tax is Germany where, starting from 2021, 25 euros will be paid for each ton of Co2. Subsequently the tax will rise to 55 euros and can reach up to 65 euros.

The number of consensus among economists is high, as evidenced by the signing of more than 3500 of them in the Climate Leadership Council’s Statement, published in the Wall Street Journal in 2019 and in which it is argued that the carbon tax is “the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary”. 

Nonetheless, carbon tax is not yet welcomed by several countries, which believe it would have enormous negative effects on the economy and employment. The United States, under Trump’s administration, are among those supporting this idea. The President also announced the country’s exit from the Paris Accords, arguing that the restrictions imposed for the climate would cost the American economy “close to $3 trillion in lost GDP and 6.5 million industrial jobs.”

However, two recent studies seem to disprove this thesis. The two researches, both conducted by Resources for the Future Institute, are based on data collected in 15 European countries that have been adopting the carbon tax for about 30 years. What emerges is that there is no evidence that the carbon tax has negative effects on growth, it seems instead that the effects on employment would even be positive. It is thought that this has to due with the fact that many countries have used the revenue from the carbon tax to reduce other taxes, thereby boosting consumption.

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