The carbon tax has been high on the news agenda lately after a heated debate in Australia that resulted in the introduction of a tax on 1 July 2012.

The Australian scheme is currently the biggest outside Europe and will apply to the 500 largest emitters as they are expected to have capital investment capabilities to improve technology and reduce carbon creation.

Most environmentally related taxes with implications for greenhouse gas emissions are levied on energy products and vehicles, rather than on carbon emissions directly.

The idea behind a carbon tax is to give polluters a financial incentive to reduce their carbon emissions, whatever the source.

The carbon tax is a Pigouvian tax, levied on market activities that generate negative externalities, i.e. it is designed to account for the social cost not covered by the private cost of that activity. This type of tax is more commonly used for products such as tobacco and alcohol.

Sweden introduced its carbon tax in 1991, and it was the second country in the world to introduce it after Finland. In Sweden, the tax applies to the use of oil, coal, natural gas, liquefied petroleum gas, petrol, and aviation fuel used in domestic travel.

The incineration of domestic waste is also taxable. The full tax is paid in transport, space heating, and non-combined heat and power generation. The rate is currently $150 per ton of CO2. Due to many exemptions, oil accounts for 96% of the revenues from the tax, although it produces less than three-quarters of CO2 from fuel combustion.

Sweden’s CO2 emissions per capita and per unit of GDP are among the lowest in Europe, partly owing to efficient and low-carbon space heating and an almost carbon-free electricity generation - nuclear and hydroelectric plants generate almost all of the country’s electricity.

The carbon tax is often accredited with Sweden’s move from hydrocarbon fuels to biomass, in particular within the heating sector, by making pollution more expensive and steering people towards energy-efficient solutions. It is, along with Finland, the country that uses the most non-fossil fuels, mainly biomass (which is excluded from carbon tax).

Some say that a carbon tax will have a negative impact on the growth of the economy. The energy intensive industry argues that it would have a negative impact on their profitability and distort competitiveness internationally.

However, since the introduction of the tax in 1991, Swedish greenhouse gas emissions have dropped 9%, while the economy has grown by 48%. The carbon tax annually generates 15 billion Swedish crowns (€1.4bn) for the state. 

It is generally argued that benefits of a carbon tax include:

• a reduction in consumption of fossil fuels – based on the assumption that the more expensive the fuel, the less people consume.
• creation of incentives for the development of energy efficiency and alternative energy sources by making renewables and low carbon fuels relatively more attractive. In addition, it encourages ‘green’ activities such as cycling.
• encourage increased investment within for example R&D and infrastructure connected to the low carbon industry.
• raise revenue for the state.

Poorer households who, for example, rely heavily on their cars may be negatively affected however compensation could be given to these households through other policies.

A carbon tax is a policy that is designed to be ‘fair’ i.e. it does not discriminate depending on source ofemissions, and it ensures that the polluter pays.