Last year, the COP26 Climate Conference pushed governments to consider different ways in which they can reduce their CO2 emissions. Imposing taxes on carbon emissions is one important way of doing so. However, history has shown that implementing a carbon tax has not always been as effective as had been hoped. This is due to various barriers faced by governments on the implementation of such a policy. Do such barriers apply to all countries? And how can they be overcome?
In our recent study, we sought to unravel this further and assess the efforts of three contrasting countries in terms of their delivery of effective carbon taxation – the Netherlands, South Africa, and Indonesia. These countries have different economic backgrounds and histories, yet our research has shown that they face common barriers in introducing and implementing carbon taxation, namely:
- The threat of economic and environmental leakage
- The resistance of industrial stakeholders
- The securing of public support
The threat of economic and environmental leakage
In introducing a carbon tax, there is the risk that the economic activity might move to another country without such a policy. This is referred to as economic leakage and is accompanied by environmental leakage. Economic leakage might impact the GDP of the country, the tax revenue, and jobs, and is therefore not desirable. However, even though this risk exists, our policy recommendation to governments is not to give up on the promise of carbon taxation. Principally, the challenge of climate change requires that all policy options must be utilized.
The resistance of industrial stakeholders
The implementation of a carbon tax can also be impeded by the resistance of industrial stakeholders. Lobbyists from mining and oil/gas sectors have tried to influence the effectiveness of carbon taxation, since a carbon tax could pose a risk for these industries. However, compliance with environmental goals could also assist their long-term security and prosperity. To maximize their involvement and overcome their resistance, we recommend the introduction of complementary financial rewards for investing in low-carbon alternatives, funded by the revenue from the carbon tax. In this way, industrial stakeholders would benefit from the “carrot” of financial rewards as compensation for the “stick” of carbon taxation.
The securing of public support
Efforts for effective carbon taxation have also been thwarted by a lack of public support. Research has shown that a carbon tax has been unpopular among the public due to a distrust in government, a lack of education, the impact on individuals, and the impact on businesses. However, even though the public is skeptical towards a carbon tax, there is evidence that a carbon tax can mitigate inequality if its revenue is used to fund a carbon dividend. While the details of redistribution are complex, there is also introduced the potential for a progressive approach, favoring the poorest in society. We therefore advocate a carbon dividend focused on providing benefits to the most vulnerable groups. This approach therefore mirrors the recommendation made for industry, as it counterbalances the penalty effect of increased prices with an accompanying revenue incentive.
Countries can be classified as guide, willing or newcomer
We then considered the comparative performance of our three countries in respect of carbon taxation, introducing a categorization of each. Firstly, we classify the Netherlands as among the Guide (Gids) Nations, since they are playing a leading role in the campaign for carbon taxation through their introduction of a supplementary carbon tax in addition to the general EU Emissions Trading Scheme (ETS). Secondly, we characterize South Africa’s approach to carbon taxation as that of a Willing (Welwillende) Nation. They have introduced a carbon tax but its rate is still insufficient to be effective. Thirdly, Indonesia is on the point of introducing a carbon tax later in 2022, and we therefore classified them as a Newcomer (Nieuwkomer) Nation.
Barriers don’t justify abandoning of carbon tax
And so, our study concludes that three very different countries face similar barriers in the introduction or continuation of a carbon tax. These barriers, however, should not become a reason to abandon such policies. To face these barriers, governments should compensate the penal nature of the carbon tax for both businesses and the public, through offering compensating rewards. Carbon taxation can be an important policy in reducing CO2 emissions, and in the fight against climate change, all policy options must be deployed.
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Dr Iain Todd is a Visiting Professor working in the Global Social Challenges (GSC) pillar of the Erasmus School of Social and Behavioural Sciences. Hannah van den Brink is a third-year student within that department.
We would welcome any comments on the above findings – please get in touch!
