A supplement to “The Big Picture: Gas Taxes” in our January 2012 issue.

More and more countries are considering carbon taxes in lieu of (or to accompany) a cap-and-trade program and are passing policy measures that provide financial incentives to curb carbon dioxide emissions.

According to the World Research Institute (WRI), a carbon tax can be defined as a fee imposed on fossil fuels based on the amount of greenhouse gases they emit. “A carbon tax places a fee on coal, for example, based on the amount of carbon dioxide (CO2) that is released when coal is burned. The tax creates a cost for emitting [greenhouse gases, GHGs] into the atmosphere (for example, $25/metric ton of CO2-equivalent) and in doing so provides a financial incentive for reducing GHG emissions,” the environmental think tanks says. Carbon tax policies could also include tax credits for activities that remove GHGs from the atmosphere.

The essential difference between a carbon tax and a cap-and-trade program is how each establishes a price for the reduction of GHG emissions. Whereas a carbon tax imposes a direct fee on fuels based on the amount of GHGs emitted, without limiting GHG emissions, a cap-and-trade program establishes a “cap” on GHG emissions and sets prices through supply and demand for emissions allowances in a trading market, the WRI says.

POWER looks at some countries that have carbon taxes as well as several others that have considered similar policy measures.


Australia

Australia’s Senate in November 2011 voted in a landmark bill that will impose a price on carbon emissions. The legislation sets a fixed carbon tax of A$23 (US$23.78) per metric ton on the top 500 polluters beginning July 2012. Increasing 2.5% annually, the tax will then move to an emissions trading scheme with a floating-rate price from July 2015. The government is expected to limit or increase the amount of tradable permits released every year, and companies would then be able to trade carbon credits with similar systems in New Zealand and Europe. See more details in January’s Global Monitor story, “Australia Levies Landmark Carbon Tax.”

Canada

The Canadian province of Quebec implemented a carbon levy in October 2007 of $3.20 (C$3.50) per metric ton of CO2. The level is readjusted every year based on the volume of sales. The rate varies for each fuel, with the gasoline levy at $0.0076 (C$0.008) per liter, diesel fuel at $0.0086 (C$0.009) per liter, propane at $0.0048 (C$0.005) per liter, and coal at $7.64 (C$8.00) per metric ton. Quebec deposits its carbon tax revenue into a “green fund,” which supports reductions in GHG emissions and improvements to public transportation.

British Columbia launched its own carbon tax in July 2008, which is applied primarily to transportation fuels, natural gas, and fuels used in industrial processes. It began at a level of $9.55 (C$10) per metric ton CO2 and increases $4.77 (C$5) per metric ton of CO2 annually until reaching a level of $28.64 (C$30) per metric ton of CO2 in 2012.

Alberta in July 2007 imposed a carbon tax on companies that emit more than 100,000 metric tons of greenhouse gas annually to either reduce their CO2 emissions per barrel by 12%, pay $15 per metric ton into a technology fund, or buy an offset in Alberta to apply against their total emissions. The tax most heavily affects oil sands companies and coal-fired power plants. Alberta’s local carbon tax allows the money to stay within Alberta.

China

According to a July report from the China Daily, China may  levy a carbon tax on its enterprises around 2012 to encourage the country’s energy-saving and environmentally friendly industries. The newspaper said state-owned entities that could be taxed include coal, natural gas, and oil companies.

Costa Rica

In 1997, Costa Rica imposed a 3.5% carbon tax on hydrocarbon fuels. A portion of the funds generated by the tax go to a "Payment for Environmental Services" (PSA) program that gives incentives to property owners to practice sustainable development and forest conservation. The program, which affects 11% of the country’s national territory, pays out roughly $15 million a year to around 8,000 property owners.

Denmark

Denmark has levied 100 DKK ($18) per metric ton of carbon dioxide from fuel combustion, applied to all energy users, including the industrial sector, since 1992. The carbon tax was imposed on top of existing energy taxes on coal, oil, gas, and power users. Most funds are used for alternative energy research.

Finland

Finland was the first country to adopt a carbon tax. Launched in 1990, Finland’s carbon tax is a separate component of Finland’s excise tax on fossil fuels used for transportation or heating. The carbon tax applies to gasoline, diesel, light fuel and heavy fuel oil, jet fuel, aviation gasoline, coal, and natural gas. Coal is subject to a tax of $73.97 (€49.32) per metric ton, natural gas is subject to a reduced tax rate of $3.02 (€2.016) per MWh, and liquid fuels are taxed between $0.07 (€0.05) and $0.09 (€0.06) per liter. Commercial vessels and commercial air traffic as well as fuels used for electricity are exempt. Electricity is taxed, but the rate per kWh does not vary according to carbon content; however, a refund is available for renewable electricity.

Initially, Finland based its carbon tax purely on carbon content but modified it to include a 60% carbon component and a 40% energy component. The energy component was a tax based on energy use in MWh rather than on carbon content of the fuel. But in January 1997, Finland returned to a pure carbon tax. The carbon tax was most recently increased by 13% to $30 (€20) per metric ton of CO2 on January 1, 2008. Carbon tax revenues have been approximately $750 million (€500 million) annually, and all revenue from the carbon tax in Finland goes directly into the general central government budget without any earmarking.

India

In March 2010, India began collecting Rs. 50 per metric ton ($1.07/t) for both Indian and imported coal. The carbon tax is expected to raise 25 billion rupees ($535 million) for the fiscal year 2010–2011. Money in the so-called National Clean Energy Fund had been earmarked to sponsor research and projects in clean energy technology to combat climate change. Last March, The Hindu reported that the fund would also be used to clean up some rivers and lakes of cultural significance, such as the Ganges.

Norway

Norway’s carbon tax began in 1991. The current tax rates vary from $15.93 (NOK 89) to $61.76 (NOK 345) per metric ton of CO2. Taxed sectors include gasoline, light and heavy fuel oil, and oil and gas in the North Sea. The pulp and paper industry, fishmeal industry, domestic aviation, domestic shipping of goods, and the continental shelf (supply fleet) pay reduced rates. The country directs carbon tax revenues to general government accounts. With this revenue and revenue from offshore drilling licenses, Norway financed a special pension fund that contained $373 billion, or nearly $80,000 for every Norwegian, at the end of 2007.

South Africa

Since 2009, coal-rich South Africa’s government has been considering a carbon tax to help it slash CO2 emissions by 34% over the next decade.  The tax could be imposed directly on all measured emissions at a rate of 75 rand ($9) per metric ton of CO2 and eventually rise to around 200 rand ($25) per metric ton. In November 2011, Pretoria adopted a white paper that laid out ways the government could tax carbon emissions, reported allafrica.com.

South Korea

South Korean deputy finance minister Yoon Young-sun in February 2010 told reporters that the country was considering a carbon tax to help it slash its emissions 4% from 2005 levels by 2020. South Korea is currently looking to pass a law to help start CO2 emissions trading by 2015. Funds from the carbon tax would generate 9.1 trillion won ($7.9 billion) in tax revenue based on 2007 emissions, and they would be used to reduce corporate and income taxes.

Sweden

In 1991, Sweden initiated a carbon tax of $44.37 (250 SEK) per metric ton of CO2. Sweden modified rates so that industry paid only $11.28 (80 SEK) per metric ton while other consumers paid $45.15 (320 SEK) per metric ton in 1993. The standard rate was $55.57 (370 SEK) per metric ton in 1996, and between 1999 and 2003 the standard rate rose to $104.83 (910 SEK) per metric ton while the rate for industry leveled off at approximately $23.04 (200 SEK) per metric ton.

Switzerland

In January 2008, Switzerland implemented a CO2 incentive tax on all hydrocarbon fuels, such as coal, oil, and natural gas—but not to transport fuels, wood, or biomass. The tax collected by the Swiss Federal Customs Administration is an incentive tax because it is designed to promote the economic use of hydrocarbon fuels. The tax amounts to CHF 12 per metric ton of CO2 (US $11.41), which is the equivalent of CHF 0.03 per liter of heating oil (US $0.0076 per gallon) and CHF 0.025 per cubic meter of natural gas (US $0.024 per cubic meter). Revenues are recycled back to consumers and businesses.

Taiwan

Taiwan’s Premier Wu Den-yih and legislators nixed a carbon tax planned for implementation in 2011, saying that the carbon taxes would increase public suffering from the recession and that the government should not levy the new taxes until Taiwan’s economy has recovered.

The Netherlands

The Netherlands’ 1990 carbon tax applies to natural gas, electricity, blast furnaces, coke ovens, refinery and coal gas, coal gasification gas, gasoline, diesel, and light fuel. In 1996, the tax rate was equivalent to $20 per metric ton of CO2. Government sources say that environmentally related taxes generate total revenue of $4.819 billion (€3.213 billion), of which the carbon tax is the majority. Most of these funds are used to reduce the general tax burden for individuals and businesses as well as to provide programs to reduce GHGs.

U.S.

Boulder, Colo., a city of approximately 100,000 people located northwest of Denver, adopted a carbon tax via a ballot initiative in November 2006. The tax, collected by the investor-owned utility, took effect in April 2007. Rates are set based on kilowatt-hour use of electricity, with residents initially paying $0.0022 per kWh, commercial customers paying $0.0004 per kWh, and industrial customers paying $0.0002 per kWh. In August 2009, the tax increased to the maximum rate allowed by the tax ordinance: $0.0049 per kWh for residential customers, $0.0009 per kWh for commercial customers, and $0.0003 per kWh for industrial customers. Collectively, the rates are equivalent to approximately $12 to $13 per ton of CO2. The tax will expire on March 31, 2013.

California’s Bay Area Air Quality Management District (BAAQMD), which covers nine counties in the San Francisco Bay Area, established a carbon fee in July 2008, and in June 2009, it was increased by 3% to $0.045 per metric ton of carbon dioxide equivalent (CDE). The fee applies to GHG emissions from BAAQMD permitted facilities. The BAAQMD establishes the cost of implementing GHG reduction programs and then sets the rate by dividing the cost by the total amount of GHG emissions from BAAQMD permitted facilities. Approximately 780 facilities are subject to the fee. The GHG fee raises revenue for BAAQMD Climate Protection Program projects related to stationary sources. Funded activities include completing and maintaining a regional GHG emissions inventory, supporting local efforts to reduce GHG emissions from stationary sources, developing regulatory measures for GHG emissions from stationary sources, reviewing GHG-related documents, addressing climate issues in the California Environmental Quality Act, and performing administrative activities such as updating databases and invoicing. The fee is expected to raise $1.1 million for the BAAQMD.

In May 2010, Montgomery County, Md., passed the nation’s first county-level carbon tax. The new legislation calls for payments of $5 per ton of CO2 emitted from any stationary source emitting more than a million tons of CO2 during a calendar year. However, only one source of emissions fits the criteria: an 850-MW coal-fired power plant owned by Mirant Corp. The tax is expected to raise between $10 million and $15 million for the county, which is facing a nearly $1 billion budget gap.   The plan calls for half of the revenue to go toward creating a low-interest loan plan for county residents to invest in residential energy efficiency upgrades. In June 2010, Mirant initiated a lawsuit against the county to halt the tax, litigation that could take years.

UK

The UK Climate Change Levy (CCL) began in 2001, imposing a tax on electricity, natural gas supplied by a gas utility, liquefied petroleum gas or other gaseous hydrocarbons supplied in a liquid state for heating, and solid fuel (such as coal and coke, lignite, semi-coke of coal or lignite, and petroleum coke). CCL rates only apply to industrial and commercial energy supplies to the industrial, commercial, agricultural, public, and service sectors.

—Sonal Patel is POWER’s senior writer.