What is a carbon tax?

Historically, sin taxes have been defined as an excise tax on goods or services that are deemed harmful to society. The concept is attributed to the author of 1776’s The Wealth of Nations, by Adam Smith. At the time, he proposed a tax on cigarettes, sugar and rum as these products were deemed unessential to life.

Since then, many more sin taxes have been implemented around the world concerning gambling, lotteries and even indoor tanning. Currently, it is safe to say the most harmful situation impacting modern society is global warming. Therefore, it is in our best interest to combat the warming of the planet by reducing our greenhouse gas (GHG) emissions. A number of countries have instituted a carbon tax as a tool in this effort.

A tax of this kind explicitly states a price on GHG emissions or uses a metric directly based on carbon (price per ton of CO2/CO2e). It can apply to various goods and services such as fossil fuels or to emissions from power plants, factories or cars. A carbon tax itself is a form of an instrument known as “carbon pricing.” Other forms include:

• Emissions trading system (ETS)

• Offset mechanism

• Results-based climate finance

While TT does not currently have carbon-pricing legislation implemented, the Minister of Planning and Development said in June that such laws are being considered as they would help TT achieve its nationally determined contributions (NDCs) under the Paris Agreement.

For context, the first carbon tax was introduced in Finland in January 1990. Today, the rate stands at €76.00 per ton of CO2 (equivalent). According to the Climate Change Performance Index 2022 (CCPI), Finland ranks as 14th. thanks to its carbon-taxation laws, among other green policies.

However, Denmark attained the highest CCPI rating in 2022. Denmark implemented its own carbon tax in 1992, shortly after Finland, and today the rate stands at US$26.62 per ton of CO2 (equivalent).

This is important to note for two reasons. Firstly, Denmark’s lesser carbon tax did not hinder its performance in the CCPI ranking, which shows that the rate of the tax is not an indicator of its success. In order to be effective, the tax must be tailor-made to the needs of the country it is operating in.

Secondly, the ranking shows there is a need for complementary policies and regulations in order to facilitate effective mitigation of climate change.

The carbon tax will not be successful on its own and it should be noted again that it is not the only viable pathway for emissions reduction.

Nevertheless, if implemented effectively, the revenue generated can be used to reduce taxes on positive activities. A 2016 global report showed that nearly US$30 billion had been collected by governments around the world from carbon pricing policies and 36 per cent of this (approximately US$10.8 billion) was dedicated to fiscal frameworks such as income tax cuts, subsidies and financial incentives for taxpayers.

Even if you are not environmentally minded, it is undeniable that the benefits of carbon taxation go beyond abating the effects of global warming. It can provide a shift from a tax on an individual's income or purchase of property to a harmful pollutant that is endangering our species.

Nevertheless, it is still important to remember that while the earth will survive the effects of worldwide rising temperatures, we may not.

This article is meant to act as a preliminary insight into carbon pricing and ETS will be explored further in a forthcoming article.

The TT Chamber of Industry and Commerce thanks Justin Ram, LLM, Regulatory Affairs Officer, Trade and Business Development Unit, for contributing this article.