Climate change and taxes

Summary of the article

Anthropogenic carbon emissions are a consequence of the burning of fossil fuels. This is related to human activities, the production of consumer goods, transport systems and electricity generation, including those produced by non-sustainable agricultural activities.

Therefore, an international mitigation strategy should be pursued, but considering the magnitude of the economic costs to be faced, an aspect that is related to the characteristics and options for economic development in the coming decades.

Great importance is attached to tax reforms, and currently they have begun to generate tools that encourage consideration of the environmental problem from the tax point of view.

In order to introduce us to the issue of dealing with Climate Change and taxes, we must consider aspects related to the administrative mechanisms and the use of market-based instruments.

The administrative mechanisms (Command-and-control instruments) involve the identification of causes and the application of sanctions, which can lead to closure. They are criticized because with these mechanisms economic activity may be reduced or eliminated, and the issue of pollution can be solved but not with a rational solution.

The advantage of using a direct regulation instrument is based on the possibility that the regulator can control polluting activities.

But it is criticized because:

  • a lot of information is required (technological costs and potential damage), in order to establish the optimal standard.
  • it does not encourage changes to occur in production processes or in the generation of pollution, since companies must comply only with predetermined and required standards.
  • the discretion of the regulator, which can set the “acceptable” emission or pollution levels based on a subjective criterion.

The economic instruments are market-based and constitute political tools that affect the behavior of economic agents in order to satisfy environmental policy objectives or modify certain behaviors through notices on the market, rather than through regulations on the control of the level or form of pollution.

These instruments can be divided into two groups:

  • as incentive instruments, in order to modify the behavior of polluters towards the environment, including taxes that are applied directly in the reduction of pollution, environmental subsidies and pollution permits,
  • as financial instruments, with the aim of generating funds that are then applied to environmental protection measures, or the transfer of payments to polluters to modify their behavior patterns.

In this regard, taxes are one of the instruments that exist and have been designed to control and manage externalities, in particular those related to environmental pollution. But these mechanisms, which are known as a market-based approach to environmental policy, also include the subsidies that are intended to reduce polluting emissions, the pollution quotas granted by the state and the systems of transferable pollution rights between private agents.

The greenhouse gas emission permits consist of setting a maximum allowed emissions standard, for the volume of which negotiable instruments are issued, and that with the possession of these instruments the emission of the corresponding amount of greenhouse gases is authorized. These permits are issued for one tonne of CO2 equivalent, and are negotiable on the secondary market, with the issuing agent being able to decide their level of emissions, with the condition that they must prove on an annual basis that they are the holder of a sufficient number of permits to cover the emissions made.

This permit system has two advantages:

  • Compliance with the environmental objective is ensured, since the maximum emission amount is predetermined, and
  • Companies are allowed to decide between polluting more and buying more permits or reducing their emissions and selling excess permits.

The difference that exists between the tax system and the permit system, are:

  • The public sector issues permit to pollute, and a control is exercised over the level of pollution by managing the number of licenses.
  • Licensing is considered a more flexible mechanism for polluters, as companies transfer permits to each other and set individually the method of controlling emissions.
  • Taxes offer polluters a direct price incentive, without having to organize a permit or license market.
  • With taxes, tax revenues increase with greater certainty
  • Taxes allow to keep polluting, with the requirement to pay the taxes.

From another point of view, the reduction of greenhouse gas emissions can be obtained with any of the main economic instruments that can establish a price on the carbon unit. For these purposes, the system of emission allowances such as the carbon tax can be used, since both intend the increase in the price of coal, fossil fuels and natural gas. Therefore, it must be decided in what way a result similar to the carbon pricing is achieved, applying taxes (costs) or trading emission allowances depending on the object of reducing emissions (quantity), pointing out that the carbon tax has certain similarities and some advantages over emission allowances:

  • the tax starts from a certain price, flexible over time, which promotes a change in the taxpayer’s behavior if the cost is less than the payment of the tax.
  • the emissions trading market and the carbon tax seek to sustain the sustainable value consisting of the non-emission of greenhouse gases.
  • the carbon and energy tax defines the sustainable value of the tax in terms of reducing polluting emissions and changing consumption patterns towards non-polluting methods that generate less CO 2 (wind, hydroelectric, nuclear energy). Also, when applying a certain tax on the energy source, the revenue is used as a means of saving and conserving energy (extra-fiscal purpose of the tax).

The political option of using these economic instruments will be fixed between a system that establishes the amount of emissions (companies buy and sell emission rights) and a tax that sets a price for each unit of emission originating contributor.

Carbon taxes put a price on greenhouse gas emissions, and thereby get the broader economy to invest in clean technologies.

From a practical point of view, one way to introduce the “carbon tax” will be by applying a tax on fossil fuels in proportion to the carbon content in said fuels.

In the Tax Reform in Argentina, the fuel tax has been modified to depend on the amount of carbon dioxide emitted, initially affecting liquid fuels and from 2020 onwards applicable to natural gas, liquefied petroleum gas and coal. With this modification, Argentina is approaching its commitment reflected in its participation in the 2015 Paris Agreement and follows the trend of applying environmental taxes (to coal) in Latin America (Mexico, Chile and Colombia).

An environmental tax reform must be oriented towards sustainable development; it can be oriented to the elimination of subsidies, the restructuring of existing taxes and the introduction of new environmental taxes.

We can indicate that:

  • the carbon pricing, including fossil fuel subsidy reforms, is an important and powerful tool to encourage low-carbon development options and contribute to the mobilization of domestic resources.
  • The carbon pricing needs to be accompanied by measures that ensure access to clean alternatives.
  • The potential co-benefits of carbon pricing include the reduction of local air pollution, reduces informality, and is a source of access to development aid.
  • The carbon pricing, including the gradual elimination of subsidies for the use of fossil fuel, is a tool that can incentivize investments that are cost-effective and aligned with the SDGs (Sustainable Development Goals) and the Paris Agreement.
  • The negative effect on Climate Change is affecting our activities. Administrative mechanisms and/or economic instruments should be applied to reduce these effects.
  • Therefore, the importance of defining at a global and local level how these mechanisms and instruments will be applied, in order to comply with the Sustainable Development Goals (SDG 2030 United Nations), the “Fit for 55” Program (European Union, reduction of 55% of Greenhouse Gas emissions by 2030) and the Decarbonization of Economies (by 2050, proposal of the Paris Agreement).


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Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.


  1. Arminda Acha Reply

    Donde puedo adquirir mas información sobre los impuestos ambientales como se aplican quienes pagan y cual es el porcentaje por favor….

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