Chapter 4. Carbon tax

In an emissions trading system, a central authority sets a cap on how much a pollutant such as CO₂ may be emitted. The cap is allocated to companies in the form of emissions permits, which give them the right to emit a certain amount of the pollutant. Firms are required to hold a number of permits equivalents to their emissions.

The total number of permits issued to all companies cannot exceed the emissions cap, and firms that need to increase their emission permits must buy them from companies that require fewer permits. This means permit buyers are paying a charge for polluting more, while sellers are being rewarded for reducing emissions.

Shifting taxation onto polluting activities protects the environment while lowering other taxes improves economic efficiency.

These economic benefits are a big part of why more than ten countries around the world now have carbon taxes, or use taxes specifically to reduce GHG emissions: Australia, Costa Rica, Denmark, Finland, Germany, Ireland, Japan, Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.²⁷

CHINA (state-based action) The Chinese Government plans to develop emissions trading schemes in seven key cities and provinces from 2013. These schemes will cover around 250 million people. The Chinese Government aims to work towards a nation-wide approach after 2015.

UNITED STATES (state-based action) There is no nationwide carbon tax levelled in the USA, although a few states have introduced the tax. The United States Administration has not been able to secure support for legislation to set either a price or a limit on greenhouse gas emissions. However, emissions trading have operated in the power sector in nine states since 2009. California’s emissions trading scheme will start in January 2013.

CANADA (province-based action) Canada does not have a federal carbon tax, but two Canadian provinces have existing carbon taxes (Quebec and British Columbia). Alberta implemented emissions trading in 2006 and Quebec’s scheme will start in 2013. A further two provinces, British Columbia and Ontario, are considering emissions trading schemes. The Canadian Federal Government has no immediate plans to implement national emissions trading. INDIA (tax on coal) In July 2010, India introduced a nationwide carbon tax of 50 rupees per tonne (less than $A1) of coal both produced and imported to India.

SOUTH KOREA The Republic of Korea passed legislation in May 2012 for an emissions trading scheme to start from 1 January 2015. The emissions trading scheme will cover facilities producing more than 25,000 tonnes of greenhouse gas emissions – expected to be around 450 of the country’s largest emitters.

JAPAN In April 2012, Japan legislated for a carbon tax of approximately ¥289 per tonne ($A3.30) by increasing existing taxes on fossil fuels (coal and LPG/LNG) with effect from 1 October 2012. Half the revenue will fund low-emissions technologies. Japan has emissions trading schemes operating in the Tokyo and Saitama regions, covering 20 million people.

EUROPE (national-based action) The European Union emissions trading scheme began in 2005 and now covers the 27 countries of the European Union, and three non-European Union members: Iceland, Liechtenstein, and Norway. Their current target is a 21 per cent cut of 2005 emissions by 2025 (Australia’s is a 5% cut of 2000 emissions by 2020). A carbon tax was proposed by the European Commission in 2010, but a carbon tax has not been agreed upon by the 27 member states. The current proposal by the European Commission would charge firms between 4 and 30 euros per metric tonne of CO₂. Several European countries have enacted a carbon tax. They include: Denmark, Finland, Ireland, the Netherlands, Norway, Slovenia, Sweden, Switzerland, and the UK.

FINLAND Finland introduced the world’s first carbon tax in 1990, initially with exemptions for specific sectors. Manly changes were later introduced, such as a border tax on imported electricity.  Natural gas has a reduced tax rate, while peat was exempted between 2005 and 2010. In 2010, Finland’s price on carbon was €20 per tonne of CO₂.

THE NETHERLANDS The Netherlands introduced a carbon tax in 1990, which was then replaced by a tax on fuels. In 2007, it introduced a carbon-based tax on packaging, to encourage recycling.

SWEDEN In 1991, Sweden enacted a tax on the use of coal, oil, natural gas, petrol and aviation fuel used in domestic travel. The tax was 0.25 SEK/kg ($US100 per tonne of C02) and was later raised to $US150. With Sweden raising prices on fossil fuels since enacting the carbon tax, it cut its carbon pollution by 9 per cent between 1990 and 2006.

NORWAY In 1991, Norway introduced a tax on carbon. However its carbon emissions increased by 43 per cent per capita between 1991 and 2008.

DENMARK Since 2002, Denmark has had a carbon tax of 100 DKK per metric ton of CO2, equivalent to approximately 13 Euros or 18 US dollars. Denmark’s carbon tax applies to all energy users, but industrial companies are taxed differently depending on the process the energy is used for, and whether or not the company has entered into a voluntary agreement to apply energy efficiency measures.

SWITZERLAND A carbon incentive tax was introduced in Switzerland in 2008. It includes all fossil fuels, unless they are used for energy. Swiss companies can be exempt from the tax if they participate in the country’s emissions trading system. The tax amounts to CHF 36 per metric tonne CO2.

UK In 1993, the UK government introduced a tax on retail petroleum products, to reduce emissions in the transport sector. The UK's Climate Change Levy was introduced in 2001. The United Kingdom participates in the European Union emissions trading scheme and is covered by European Union policies and measures. The United Kingdom has put in place regulations requiring all new homes to have zero emissions for heating, hot water, cooling and lighting from 2016.

IRELAND A tax on oil and gas came into effect in 2010. It was estimated to add around €43 to filling a 1000 litre oil tank and €41 to the average annual gas bill.

COSTA RICA In 1997, Costa Rica enacted a tax on carbon pollution, set at 3.5 per cent of the market value of fossil fuels. The revenue raised from this goes into a national forest fund which pays indigenous communities for protecting the forests around them.

BRAZIL The state of Rio de Janeiro is exploring options to implement a state-wide cap and trade system.

SOUTH AFRICA South Africa introduced a carbon tax on new vehicle sales in September 2010. South Africa is planning to introduce a carbon tax from 2013, starting at R120 ($A15) per tonne for emissions above a threshold. Each company will have 60 per cent of its emissions tax exempt, with higher exemption thresholds for cement, iron, steel, aluminium, ceramics and fugitive emissions as well as trade exposed industries. Agriculture, forestry, land use and waste will not be taxed.

NEW ZEALAND The New Zealand Government set up an emissions trading scheme in 2008. The scheme covered forestry initially, and was then expanded in 2010 to cover stationary energy, transport, liquid fossil fuels and industrial processes.²⁸