How Well Do Carbon Taxes Match Their Promise? A New Proposed Metric (2023)
taxfoundation.org

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Key Findings

- - - Carbon taxes are a popular solution to climate change because they are an economically efficient way to price in negative externalities of greenhouse gas emissions.

- - - In practice, carbon taxes have been partial measures, either exempting certain sectors of the economy or offering substantially reduced rates for certain activities.

- - - One way to judge the design and administration of carbon taxes is by measuring the ratio of actual revenue collected divided by potential revenue, known as a c-efficiency ratio. The resulting ratio illustrates how well the tax captures the theoretical tax base.

- - - The Canadian territories of Northwest Territories and British Columbia, as well as Japan and Luxembourg, performed the best, with c-efficiency ratios around or above 0.6.

- - - The average c-efficiency ratio of the jurisdictions studied is 0.29, and the weighted average c-efficiency ratio is 0.24.

- - - Some countries employ multiple carbon pricing systems, often for different sectors of the economy, which explains some carbon taxes' lower c-efficiency ratios.

- - - The high c-efficiency ratios of some high-income jurisdictions that rely heavily on carbon taxes show it is a viable policy tool for capturing its desired tax base.
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