CO2 Tax Often Governed by Fiscal Policy Rather Than Climate Policy

Although carbon taxes levied on fossil fuels are often considered a useful instrument for climate policy, until now many of these taxes have scarcely had any impact worth mentioning on reducing emissions. “Although it remains debatable whether high CO2 taxes have a major effect, the fact that low taxes only have a negligible impact is generally accepted,” explains Johan Lilliestam, Chair of Sustainability Transition Policy at FAU. 25 countries across the globe have introduced national CO2 taxes, but they are only high enough to be effective in six of them. “In 19 countries, carbon taxes were so low when they were introduced that they were not suitable to reduce emissions,” explains Lilliestam. “We assume that the governments were aware of this, and so we wanted to find out why they introduced a such a low carbon tax.”

Three groups identified

Together with researchers from the University of Potsdam and RIFS, Lilliestam researched which political reasons were behind the decision to introduce low CO2 taxes and how they have developed over time in each of these 19 countries. The researchers evaluated draft bills and explanatory statements but also secondary sources from scientific institutions and international organizations. The result: “We identified three groups of low carbon taxes”, reports Lilliestam. “The first group includes countries that introduced low CO2 taxes with the intention of successively increasing them, for instance Switzerland, France and Canada. This way, they could circumvent political opposition in the short, while seeking to use the tax to reduce emissions in the long run.” The second group, including Japan, Singapore and Columbia, mainly introduced the tax to finance other climate action and environmental programs.

The third group was the largest: 13 of the 19 countries introduced low CO2 taxes without pursuing primarily climate-related objectives. They used the tax revenue to generate funds for specific purposes not connected to climate protection, for example in Finland to reduce income tax or in Iceland and Ireland to increase state revenue in general. Argentina, for instance, introduced CO2 tax to support its application for OECD membership, as the organization recommends these taxes. “There are also countries such as Poland where the carbon tax is so low that it neither has an impact on emissions nor generates any revenue worth mentioning,” explains Johan Lilliestam. It would certainly appear as if these taxes are nothing other than symbolic policies.”

Several countries have increased their carbon taxes, sometimes strongly, and amended them to have a stronger focus on reducing emissions. In many cases, this was a very slow process, often taking 10 years or more, but it does show that policy rationales sometimes change.

Researchers ought to take a closer look

During their research, the authors were surprised how clearly some countries justified their CO2 taxes as fiscal policies, and how little science has evaluated the effectiveness and political justification for a CO2 tax in reality and not only in theoretical models. “The accusation that we failed to take a more critical look is justified,” says Johan Lilliestam. The researchers stress that the mere introduction of a tax like this and the increasing number of CO2 price instruments worldwide are not in themselves an indication of progress in the field of climate policy. According to Germán Bersalli, research associate at RIFS and co-author of the study, “climate policies should not be judged by their label but by their design, target and actual impact on the transformation of our economic system on the path toward zero emissions.”

• Lilliestam, J., Eckardt, J., Bersalli, G. (2025). Sequencing, spending, and symbolism: Low carbon taxes primarily serve purposes other than emissions reduction. One Earth. https://doi.org/10.1016/j.oneear.2025.101390.
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