(See also a version of this question under politics, https://politics.stackexchange.com/questions/48764/why-arent-we-seeing-carbon-taxes-in-practice)

It seems that there are many advantages to carbon taxes, including pricing in the environmental cost and generating revenue (that could offset other taxes). So why are we not seeing them in practice, at least not very much of them? I can think of some reasons below, but I don't know which of these if any actually play a significant role in practice and/or are actually well motivated. Am I missing anything? Is there any good study of this?

  1. Too difficult to implement / will generate an underground carbon economy. This would be a concern with many taxes, but it seems we should be able to have a pretty good handle on where carbon enters the economy given the necessary physical volumes and processing.

  2. Will hurt economic activity. But it seems that this can be addressed by using the revenue to stimulate economic activity / reduce distortionary taxes.

  3. Will create too big of a shock to the economy with unpredictable consequences. But the tax could be gradually introduced according to a schedule.

  4. Unfair to industries that will suffer from this tax. But we generally don't seem inherently very concerned about disruption of industries (e.g., taxi industry) and it is hard to argue that such action would come as a surprise at this point. Also, again, the tax could be gradually introduced according to a schedule.

  5. Will economically hurt people who can't afford it. But this could be addressed by using the revenue intelligently (or by targeting only certain types of carbon, e.g., airline tickets).

  6. Politically hard to sell. Even if it is in their interest, too many citizens will reflexively complain about, for example, high gasoline prices. But would they really feel this way when combined with, for example, a check made out from the government distributing the revenue in a basic-income sort of way? Or is there some other effective way to clearly present it as not just an additional tax from a greedy government?

  7. Industry is politically too powerful. It will attack/reward politicians based on their actions and launch massive public relations campaigns. But is it really that powerful or is that exaggerated in people's imagination?

  8. Even though many of the above aren't actually true, citizens and/or politicians are unduly worried that they are true (or simply not well educated about the option), are risk averse, and therefore they don't pursue this route.

  • $\begingroup$ @Roland It was intended as a more general question. Note the question is about a straight carbon tax, not complex emission rights trading schemes. However, given the failures of such schemes maybe it is indeed a good idea to just consider straight taxes of carbon again. $\endgroup$ – present Dec 15 '19 at 18:25
  • $\begingroup$ @Based Well one could charge import taxes to correct for the carbon pricing discrepancy... Or attempt to avoid charging industry. $\endgroup$ – present Dec 16 '19 at 14:09
  • $\begingroup$ The general argument used is: taxing a business makes them not want to produce things therefore it hurts everyone. (no, it doesn't get much more nuanced than that) $\endgroup$ – user253751 Dec 16 '19 at 15:51
  • $\begingroup$ @user253751 I should have expressed that more carefully. I meant that, when for example technology disrupts an industry, as ride hailing services have done to the taxi industry, people pay attention but it's not like citizens are broadly up in arms about that. So the electorate seems to be willing to accept industry disruption to some degree in general. And, again, carbon taxes could in principle be used to offset other business taxes. $\endgroup$ – present Dec 16 '19 at 16:02
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    $\begingroup$ I think the electorate (at least in the USA) broadly rejects anything seen as government interference. People outside the taxi industry aren't up in arms ride hailing services because it's not the government doing it, but they're up in arms about carbon taxes because it's the government doing it. Broadly speaking. $\endgroup$ – user253751 Dec 16 '19 at 16:04

I think it’s mainly politics. For example, when France tried to implement increases in tax on oil (indirect way of taxing carbon) it led to yellow jacket protest.

  1. As you pointed out it’s easy to track who produces the carbon in the economy. Especially on industrial level in developed countries. The reason 1 could be problem in some developing countries though.

  2. As you pointed out the revenue can offset any negative effect as with Pigovian taxes there is no deadweight loss - if set properly

  3. Again you answered yourself plus I would add in a long run it’s better to undergo temporary shock to avoid higher cost down hill.

  4. I don’t think you can say it’s unfair. In fact I would say the fact that the industries create externality in the first place due to lack of property right is unfair (at least if we agree that creating externality is not fair to society which I think most moral thinkers would - although that’s question for philosophy SE).

  5. You again answered yourself.

If you look at the attempts to introduce carbon taxes then you will see 6-8 are the main culprits. In France you get yellow jacket protests in Netherlands farmers protests, in Washington voters refused carbon taxes in referendum last year (see here)etc. - all responses to trying to introduce Pigovian taxes of one kind or another. People of any political affiliations generally don’t like taxes when they are taxes on them as well. I suppose many people also are skeptical the government will make it revenue neutral later by lets say sending check to all people so their income stays the same. In case of redistribution some might not like that and others also don’t believe social spending will increase.

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    $\begingroup$ @present I actually don’t know because I don’t really specialize in behavioral economics. However, not all pushback against these taxes is irrational. For example, even in a game theory model where you have rational agents but there is lack of trust that the government will make it revenue neutral you get prisoner dilemma type scenario where even though adopting carbon pricing Pareto dominates not adoption the non-adoption will be equilibrium. In that case you don’t need behavioral solution but as Bajun mentioned some policy commitment mechanism (but I am sure behavioral Econ can help too) $\endgroup$ – 1muflon1 Dec 15 '19 at 10:08
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    $\begingroup$ “it’s easy to track who produces the carbon in the economy” Really? If a company imports resources or components, how do you carbon tax them? Even fossil fuels can have a different carbon footprint depending on how they were extracted and processed. $\endgroup$ – Michael Dec 15 '19 at 18:56
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    $\begingroup$ @1muflon1: It’s only easy if sellers/producers have accurate CO₂ reports. Probably not the case if they are in a foreign country. If I were to import, for example, an Intel CPU, how much should we tax? I wouldn’t even know if it was made in an American or Chinese fab. Even if I knew where it’s coming from, they won’t tell me the CO₂ footprint. So the only “solution” would be a blanket tax on product categories (e.g. electronic products) regardless of the actual CO₂ numbers. Next issue: Is something like a drill an electronic product or a mechanical tool? $\endgroup$ – Michael Dec 15 '19 at 19:17
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    $\begingroup$ @Michael I agree levying appropriate carbon taxes on imports may be nontrivial, but it seems possible to do something reasonable... In any case this does not seem to be an excuse not to tax carbon in settings where there are no such issues (e.g., flights, gasoline, ....)? $\endgroup$ – present Dec 15 '19 at 20:55
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    $\begingroup$ @1muflon1 It is actually an extremely difficult engineering problem to do a full accounting of carbon emissions in all industries and through the full product life cycle. This is the subject of much controversy, especially in a world in which CO2 as such is not the only GHG (think fugitive methane emissions, sulfur hexafluoride, etc). There are ISO standards on the matter, but they are imperfect - for example, top-down and bottom-up accounting rarely matches, and the literature increasingly contains examples of in-situ measurement exceeding modeled estimates by factors up to tenfold. $\endgroup$ – heh Dec 17 '19 at 17:31
It seems that there are many advantages to carbon taxes, including pricing in the environmental cost and generating revenue (that could offset other taxes). So why are we not seeing them in practice, at least not very much of them?

We do, but not in an optimal way.

I'm a forest owner. My forest sequesters about 40 tonnes of carbon dioxide every year. If I let my forest grow to a higher density before chopping the trees, I should:

  • Get a carbon payment from the sequestered carbon caused by growth to a higher density
  • Have to pay carbon taxes if some of the trees are burned to energy or converted to short-lived products such as pulp or paper that will very quickly be burned to energy

However, no such payment scheme is in place. Thus, it isn't economical to let the forest to grow to a very high density (lots of sawlogs used to construct buildings that retain the carbon for 100 years), but rather chop it down earlier (lots of pulpwood that retains the carbon for 1 year or so).

On the other hand, I calculated that a Finnish car owner effectively pays 500 EUR of taxes for every tonne of carbon dioxide produced. This is caused by three taxes:

  • Tax when buying a vehicle
  • Yearly tax when owning a vehicle
  • Tax on fuel when refueling a vehicle (this is by far the largest of the three)

Also, there is European emission trading scheme. The carbon price today is 25 EUR / tonne of carbon dioxide. For some strange reason, it doesn't apply everywhere, so there are still sectors that don't have to participate in emission trading.

So, to wrap it up:

  • Owners of carbon sinks such as growing forest are not compensated in any manner for the sequestered carbon dioxide
  • Energy sector pays 25 EUR / tonne of carbon dioxide
  • Finnish car owners pay 500 EUR / tonne of carbon dioxide

As a fun fact, if the price of carbon dioxide was 500 EUR / tonne everywhere, including carbon sinks, my forest would have a 78% annual yield before income taxes.

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    $\begingroup$ It would be interesting to speculate what the economy-wide consequences would be of a €500/tonne carbon tax... $\endgroup$ – gerrit Dec 17 '19 at 9:08
  • $\begingroup$ Sorry @gerrit I stole your question: economics.stackexchange.com/q/33308/24694 $\endgroup$ – juhist Dec 17 '19 at 17:42
  • $\begingroup$ No problem — I didn't ask it because I thought it might be considered too speculative/opinion based, but we'll see what the community here thinks. $\endgroup$ – gerrit Dec 17 '19 at 17:58

Just to build up on @1muflon1's (+1) answer:

I'd also add the "axe the tax" campaign in British Columbia back in 2008. The carbon tax there is (or at least was) considered a model example of how to implement revenue neutral carbon tax. Despite catchy slogans, the ruling party survived the election and so did the carbon tax. However, it brings us to the political disadvantages of policies like that – even though the tax was revenue neutral, the opposing parties were ready to abolish it (if only it meant that they win the elections), therefore the policy like carbon tax, in its core, is not “politics-proof”.

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  • $\begingroup$ Exact same for the Australian example. "Axe the tax" was used here too $\endgroup$ – Fred Stark Dec 16 '19 at 1:35
  • $\begingroup$ Lots of taxes could be made "revenue neutral" and still be perceived as unfair by a large number of the electorate. $\endgroup$ – towe Dec 16 '19 at 15:17

Germany is introducing a carbon tax. It will start at €25/ton in 2021 and increase to €55/ton in 2025. Although many argue that this is too little, too late, others are saying that it will start to have an effect on consumption from around €30/ton (I read this figure in an offline newspaper). In an earlier iteration, the proposal was a carbon tax starting at just €10/ton.

The Swedish carbon tax at more than €100/ton has correlated with, and possibly caused, the phase-out of the use of fossil fuels for (district) heating.

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One reason is that in a globalized economy, there is an intractable co-ordination problem to imposing a carbon tax regime. If you've worked with the iterated prisoner's dilemma, you'll have seen that depending on the payoff structure, co-operation is unsustainable in the absence of a credible punishment strategy - even if co-operation results in higher total welfare.

Multilateral actions like the Kyoto Accord and the Paris Agreement are attempts at addressing the co-ordination problem around climate change, but neither the UN nor any other body has the unilateral ability to present a credible threat to defectors. As such, a great deal of conversation on pricing carbon centers around industry's concerns on competitiveness, the economic impact on households, etc. Even though the standard Pigouvian tax would be revenue-neutral (and indeed, revenue-generating for agents who emit carbon at below-average rates), almost by definition the most significantly-impacted industries will be those who, through avoidance of paying the true cost of their inputs, have become economically significant in jurisdictions worldwide. Thus, you have this concept of an "Emissions-intensive Trade Exposed" sector, driving policy that is hobbled from the outset by awarding "output-based allocations".

This might be workable if the carbon price being contemplated were actually sufficient to move the needle. However, the 30-units-per-ton price that is frequently tabled in discussions around the world is just an arbitrary political jumping-off point, based on an emissions-reduction cost-curve that is over a decade old. It is the nature of this problem that costs should be expected to increase with delay - and not linearly, but exponentially. True social costs of carbon are currently estimated in the hundreds of currency units per ton.

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Sir Nicolas Stern, a British economist and a professor at the College de France, has called climate change:

The greatest market failure that the world has ever seen.

Of course now we're also faced with the evidence of the massive market failure of health care in the USA which has 4.25% of the world's population but accounts for a massive one quarter of the total global deaths from the corona-virus pandemic, not to mention the historical market failure of the transatlantic slave trade brought to the world's attention through the #BlackLivesMatter movement.

Thus, contrary to the OP's posit, it's not surprising that market mechanisms for mitigating climate change such as carbon taxes and emissions trading have proved failures.  A more radical solution is called for such as the global nationalisation of fossil fuels with the aim of winding down the entire industry and investing heavily in renewable green energy on the scale that actually befits the problem to be faced. The basic science has been long understood -  it's not rocket science - and one can charge the fossil fuel companies with a dereliction of duty in merely continuing business as usual: For example,  Exxon-Mobil plans to pump around 25% more oil and gas than it did in 2017,  the industry spends more than 100 million dollars in lobbying in the US. 

Moreover,  according to a working paper of the IMF, the cost of climate change externalities considered as subsidies to the industry amount to 4.7 trillion dollars in 2015 (6.3% global GDP), and in 2017, they are projected to amount to 5.2 trillion dollars (6.5% of global GDP).

Interestingly, there are roughly 1,500 fossil fuel companies listed on the world's stock exchanges with a total valuation roughly around 4.65 trillion dollars. Thus taking subsidies into account, we see that the net worth - financially speaking - of the fossil fuel industry is more or less zero. Given that the subsidies are ongoing, we see that in fact the fossil fuel industry is rapidly heading into negative equity prompting one leading research group to project a massive carbon bubble in the near future upto 16 times larger than the one causing the financial crisis in 2008.

According to the IMF, simply eliminating these subsidies would bring down global carbon emissions by 28% in 2015.

Given the complicity of the fossil fuel industry in defending their turf to the detriment to the greater good once man-made climate change was understood as a fact,  and not re-envisioning themselves more widely as energy companies with a duty to take into account this externality, a punitive legal framework is also called for, similar to that levelled at the tobacco industry for knowingly poisoning people's lungs,  whereas of course here,  they are knowingly poisoning our planets lungs. The only one we have.

Why aren't we seeing carbon taxes in practise?

Given everything I have said above, it's simply because they are the wrong solution to an ongoing chronic crisis.

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  • $\begingroup$ "Of course now we're also faced with the evidence of the massive market failure of health care in the USA which has 4.25% of the world's population but accounts for a massive one quarter of the total global deaths from the corona-virus pandemic, not to mention the historical market failure of the transatlantic slave trade brought to the world's attention through the #BlackLivesMatter movement." ??? What are you talking about? This has nothing to do with the question! $\endgroup$ – Giskard Jul 6 at 20:40
  • $\begingroup$ (-1) "Thus, contrary to the OP's posit, it's not surprising that market mechanisms for mitigating climate change such as carbon taxes and emissions trading have proved failures." As the previous paragraph was about unrelated issues, there is zero proof that this is true, and also it is not clear that the mechanisms so far implemented are actually what the OP is asking about. $\endgroup$ – Giskard Jul 6 at 20:41
  • $\begingroup$ P.s. You should accept some answers. $\endgroup$ – Giskard Jul 6 at 20:43
  • $\begingroup$ @Giskard: I'm giving additional evidence by what is meant by market failures. I think that is obvious enough. $\endgroup$ – Mozibur Ullah Jul 7 at 6:39
  • $\begingroup$ @Giskard: What do you mean by 'I should accept some questions'? This is an answer rather than a question so your comment makes no sense whatsoever. Moreover, even if I had asked a question, there is no' should' about accepting an answer. They may, for example, simply not be good enough to bother accepting as a good answer. $\endgroup$ – Mozibur Ullah Jul 7 at 7:45

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