As of mid-2024, 74 countries and over 1,000 companies have committed to or implemented carbon pricing, covering 11.9 gigatons of CO2 equivalent, 25% of global greenhouse gas emissions, according to World Bank (WB) data. This increased from 68 jurisdictions in 2023. 

Global CO2 emissions were approximately 36.2 gigatons in 2023, a slight reduction from the 36.5 gigatons recorded in 2022, as per the International Energy Agency (IEA). 

Coincidence? Is Carbon taxation the long-coveted messiah who finally arrived? Or is there a dark side of the moon?

While marginally positive, the apparent decrease in greenhouse gas (GHG) emissions falls far short of the reductions required to meet the Paris Agreement targets. To limit global warming to 1.5°C above pre-industrial levels, global emissions must decrease by about 7.6% annually, per United Nations Environment Programme data (UNEP). 

Despite the expansion of carbon pricing, the impact on global emissions remains limited, largely because the average global carbon price in 2023 was just $8 per ton, significantly lower than the $75 per ton by 2030 that the International Monetary Fund (IMF) recommends as necessary for substantial emission reductions. 

Again, in regions where carbon prices are relatively high, such as the European Union and Canada, emissions have shown some signs of decline, which is true. Still, in many other regions, particularly developing countries, carbon prices are too low to drive meaningful reductions. While the expansion of carbon pricing is a step in the right direction, the overall impact remains muffled due to insufficient pricing levels and inconsistent enforcement. 

In Asia, for example, countries like Indonesia and Vietnam introduced carbon-pricing mechanisms driven by the urgent need to balance economic growth with environmental sustainability. Meanwhile, Latin America saw Colombia and Chile strengthen their carbon taxes. 

However, the implementation of carbon taxation remains inconsistent, both in terms of pricing levels and coverage. For instance, while the European Union continues to lead with its Emissions Trading System (ETS), where carbon prices reached €96 per ton of CO2 in 2023–according to the European Environment Agency, other regions, such as Africa, still struggle with limited or no carbon pricing mechanisms. Economic and political challenges in these areas make it difficult to adopt robust carbon pricing.

Carbon taxation is often compared with cap-and-trade systems, which aim to reduce emissions but use different mechanisms. A 2024 study by the World Resources Institute (WRI) found that while both systems can be effective, carbon taxes provide more predictable outcomes regarding emission reductions and revenue generation. 

The premise of carbon taxation is straightforward: By imposing a financial penalty on carbon emissions, governments can disincentivize pollution, encourage businesses and consumers, and significantly reduce carbon footprints. However, the practical outcomes of carbon taxation have varied significantly across regions and countries.

Success

Sweden, for instance, has been a poster child for the success of carbon taxation. With a carbon tax that reached €148 per ton in 2024, Sweden has managed to reduce its CO2 emissions by 40% since the introduction of the tax in 1991, even as its economy grew by over 83% (Swedish Environmental Protection Agency, 2024). 

The key to Sweden’s success lies in the high tax rate and the strategic reinvestment of tax revenues into renewable energy, energy efficiency, and public transportation infrastructure. These investments have helped Sweden transition towards a low-carbon economy, setting an example for other nations. 

The EU’s Emissions Trading System (ETS), the largest cap-and-trade program in the world, is complemented by national carbon taxes in several member states. As of 2024, the average price of carbon permits in the EU ETS has exceeded €90 ($98) per ton, per the European Commission, contributing to a 30% reduction in emissions across the EU since 2005. The combination of ETS and national carbon taxes has effectively reduced emissions across multiple sectors. 

Canada’s carbon tax, which began at CAD 20 ($15) per ton in 2019, has incrementally increased to CAD 50 ($37) per ton as of 2024, with plans to reach CAD 170 ($126) by 2030. A 2023 report by the Canadian government indicated that the carbon tax has led to a 4% reduction in emissions from 2019 levels while the economy grew at an average rate of 2.1% per year. 

Since introducing a carbon tax in 2008, British Columbia has seen a 12% reduction in emissions compared to the rest of Canada. The tax is designed to be revenue-neutral, with tax cuts in other areas offsetting the increased costs of carbon-intensive goods. This approach has reduced emissions and supported economic growth, with the province’s GDP growing faster than the Canadian average.

Big fishes continue evading

On the other hand, despite being one of the world’s largest carbon emitters, the US has yet to implement a federal carbon tax. Instead, carbon pricing remains fragmented, with states like California leading the way through their cap-and-trade systems while other states have no such mechanisms. As a result, the US achieved only a 1.2% reduction in energy-related CO2 emissions in 2023, driven more by market dynamics, such as the increasing affordability of renewable energy, than by carbon pricing.

China’s carbon market, launched in 2021, sets the price at approximately CNY 50 per ton of CO2 (about $7.70), which is widely considered too low to incentivize significant behavior changes. At such a low price, companies are not sufficiently motivated to invest in cleaner technologies or reduce their carbon footprints.

Political economy of carbon tax

Carbon taxation, while theoretically sound, faces significant political hurdles. Carbon taxes raise the price of goods and services that rely on fossil fuels—such as electricity, gasoline, and home heating—low-income households are disproportionately affected. These households typically spend a larger share of their income on energy, making the increased costs due to carbon taxes a heavier financial burden than wealthier households. 

As witnessed in France, Canada, and Australia, public resistance to increased energy prices often leads to protests and political backlashes. The ‘Yellow Vest’ protests in France were a direct response to a planned fuel tax hike, which was intended to cut carbon emissions but was seen by many as unfairly targeting working-class citizens. Many protesters argued that the fuel tax unfairly penalized rural and lower-income citizens who depended on cars for work and daily life, highlighting the regressive effects of carbon pricing on economically disadvantaged communities. 

For many countries, particularly those with weaker governance structures, the administrative complexity of implementing and enforcing a carbon tax can be a significant barrier. Poor governance can result in uneven enforcement, where some industries or regions are taxed heavily while others evade regulation, undermining the tax’s fairness and environmental effectiveness. According to a 2024 survey by the Bangladesh Chamber of Commerce and Industry, 74% of business leaders opposed introducing a carbon tax, citing concerns about reduced competitiveness and potential job losses.

Carbon leakage

The impact of carbon taxation on energy-intensive industries, which could face steep increases in production costs. Industries such as steel, cement, and chemicals rely heavily on fossil fuels for production, and higher energy prices can make them less competitive internationally. This leads to a phenomenon known as ‘carbon leakage,’ where companies shift production to countries with less stringent or no carbon taxes, effectively moving emissions elsewhere rather than reducing them. 

A report from the International Monetary Fund (IMF) highlights that carbon leakage can undermine the environmental goals of carbon taxes. If companies relocate to countries with weaker environmental regulations, global emissions may not decrease and could potentially increase. In industries where international competition is fierce, this relocation can also lead to job losses and economic stagnation in the countries enforcing carbon taxation. In a 2023 report, the International Monetary Fund noted that the economic burden of carbon taxes is likely to be felt most intensely in the short term, while the long-term environmental and economic benefits may take years to materialize.

Impact analysis

The burning issue with the current global carbon taxation framework is the blatant disparity in how these taxes are applied across different countries. Wealthier nations, which bear historical responsibility for the bulk of global emissions, often implement carbon taxes to minimize their economic impact. 

For instance, the European Union’s Emissions Trading System (ETS) allows companies to purchase carbon credits through ‘carbon offsets’, enabling them to meet their obligations by investing in emission reduction projects in developing countries rather than cutting their own emissions domestically. This approach raises ethical and moral questions. So practically, by relying on carbon offsets, wealthy nations continue emitting domestically without making noteworthy changes to their industries. 

The effectiveness of these offsets is also questionable. A study by the Stockholm Environment Institute found that up to 85% of carbon offsets under the Clean Development Mechanism (CDM) did not result in measurable and additional emission reductions. 

In contrast, developing countries like Bangladesh face far stricter requirements under ESG (Environmental, Social, and Governance) standards imposed by international financial institutions and multinational corporations. These standards often require significant reductions in carbon intensity, which can be difficult to achieve without substantial financial and technological support. The result is an inequitable system where the countries least responsible for climate change bear the heaviest burdens of global climate action. 

While wealthy nations can afford to implement higher carbon taxes and invest in green technologies, developing countries often have inadequate resources to make the necessary transitions. This inequity raises important questions about the fairness of the global carbon taxation framework and its ability to deliver meaningful results.

Assessing the roles of international bodies

International organizations such as the United Nations Framework Convention on Climate Change (UNFCCC), the World Bank, and the IMF play crucial roles in shaping and enforcing global carbon policies. However, their effectiveness in addressing disparities in carbon taxation has been mixed. 

The UNFCCC’s principle of “common but differentiated responsibilities” recognizes that while all countries must contribute to the fight against climate change, developed countries should take the lead due to their historical emissions and greater financial capacity. However, implementing this principle has been inconsistent, with wealthier nations often shirking their responsibilities while placing undue pressure on developing countries to implement stringent carbon reduction measures. 

The World Bank and IMF have also been instrumental in promoting carbon pricing as a key policy tool for reducing emissions. However, their recommendations often fail to account for developing countries’ economic realities. For instance, the IMF’s push for a global minimum carbon price of $75 per ton by 2030 is admirable in theory, but in practice, it may be unattainable for many low-income countries without significant financial and technical assistance. 

The World Bank’s efforts to support the implementation of carbon pricing mechanisms in developing countries are similarly constrained by the limited financial resources available to these nations, highlighting the need for a more nuanced and equitable approach to global carbon policy. Without greater support from the international community, including increased financial assistance, technology transfer, and capacity-building initiatives, developing countries will continue to struggle to meet their climate goals.

Plights of Bangladesh

Bangladesh, one of the world’s most climate-vulnerable countries, has faced frequent floods, cyclones, and rising sea levels. Despite these challenges, Bangladesh’s economy has grown at an impressive rate over the past decade. But, this economic growth has been accompanied by a rise in CO2 emissions. 

Bangladesh has also introduced a carbon tax (owners of multiple cars) in 2023 at a modest rate of $2 per ton. This rate, while symbolically significant, is far too low to drive substantial changes in emissions, which rose to 95 million tons in 2023, up from 92 million tons in 2022, according to WB. 

Bangladesh’s economic structure complicates the implementation of carbon taxation. The country’s economy heavily depends on energy-intensive industries such as textiles, which account for a significant portion of its GDP and employment. The Asian Development Bank (ADB) estimates that a $15 per ton carbon tax could reduce the textile sector’s growth by 1.2% annually. 

Implementing a higher carbon tax could smother economic growth, increase poverty, and lead to social unrest, making it politically and economically unfeasible. The tax will likely increase energy and basic goods costs, disproportionately affecting low-income households.  

Also, the revenue generated from the carbon tax—approximately $40 million annually—is insufficient to fund the significant investments needed in renewable energy and climate resilience. According to the World Bank, Bangladesh needs $3 billion annually to enhance its climate resilience, a significant portion of which could be funded through carbon taxation. 

The global community must confront the disparities in carbon taxation and ensure that the burden of climate action does not fall disproportionately on those least responsible for the problem. Wealthier nations must take the lead in reducing emissions, providing financial support to developing countries, and ensuring that global climate policies align with environmental justice principles. The future of our planet depends on our ability to work together, across borders and economic divides, to combat climate change. 

Galib Nakib Rahman initially worked as an MTO and, later, as an executive officer with Prime Bank PLC. He is currently a senior executive with the Dhaka Stock Exchange in the Corporate Governance and Financial Reporting Compliance Department in the Regulatory Affairs Division. galibnakibrahman@gmail.com