Chapter 01 · Climate & transitionClimate & Greenhouse Gas Emissions
Carbon tax
Definition
A government-imposed charge set at a fixed rate per tonne of CO₂ (or CO₂e) emitted, applied either upstream (on fuel suppliers, by carbon content) or at point sources. Alongside emissions trading systems, it is one of the two main direct carbon-pricing instruments; the World Bank tracks dozens of implemented carbon taxes worldwide as part of the 87 direct-pricing policies now in force.
References
Instrument counts and coverage; 2025 revenues >US$107bn; spread of taxes across middle-income economies.
Design variables (scope, gases, point of regulation, thresholds); national and subnational tax examples.
Overview
What it means
The tax fixes price and lets emissions respond — the mirror of an ETS, which fixes quantity and lets price float. Its appeal: administrative simplicity, price predictability for investment, and revenue that can be recycled to households (fee-and-dividend), industry transition or general budgets (over US$107 billion was raised globally from carbon taxes and ETSs in 2025).
Its vulnerabilities: political visibility (several taxes have been repealed under pressure), competitiveness and leakage concerns (motivating CBAM-style border adjustments), and regressivity if revenues are not progressively recycled.
How it is used
Jurisdictions from Sweden and Singapore to Mexican states operate carbon taxes, often alongside or layered on ETSs; companies model tax exposure in planning and internal carbon pricing; hybrids allow offset use against tax liability (e. g. South Africa's design).
Why it matters
Carbon taxes are the most direct statement of the polluter-pays principle in fiscal law; their level, coverage and revenue use are a litmus test of climate-policy seriousness.