Do Carbon Taxes Work?
In recent years, several countries have introduced carbon taxes as a way of making consumers change their habits to support a green transition. However, it remains unclear whether carbon taxation and rebates can have a lasting impact on the reduction of greenhouse gas (GHG) emissions and consumer spending.
Austria introduced a range of carbon taxes aimed at encouraging consumer decarbonisation. In the Austrian model, the money raised from the tax gets returned directly to taxpayers. This was aimed and encouraging higher levels of public spending while reducing emissions, to bolster the national economy. The central European country aims to achieve net-zero carbon emissions by 2040, a whole decade ahead of the European Union’s deadline and its carbon tax is expected to help it achieve this aim.
In Austria, around 69.3 percent of GHG emissions were subject to a positive Net Effective Carbon Rate (ECR) in 2023, according to OECD estimates. Fuel excise taxes covered around 52.8 precent of emissions that year. The research showed that ECRs were $93 per tonne of CO2e on average, while explicit carbon prices stood at an average of $48, fuel excise taxes amounted to $57 on average, and fossil fuel subsidies averaged $12 per tonne of CO2e.
The carbon tax is not only aimed at companies but also individuals, encouraging people to drive less and take public transport more, alongside several other habit changes. The rebate, known as the Klimabonus, varied by region depending on access to public transport networks and other factors, and in 2024, the annual payment ranged from $169 to $338 for an adult resident.
There was a mixed response from Austrians when the initiative was first proposed, although it received wide enough support to keep it. However, this year, the new Austrian government decided to change the initiative by eliminating the rebate payments to taxpayers.
The decision was made after assessing the total cost of the scheme in the face of a national recession. Austria has been forced by the EU to reduce its budget deficit by cutting spending, introducing higher taxes, and stimulating economic activity. Cutting the rebate is expected to save around $2.3 billion a year.
While Austria has been successful in reducing its carbon emissions in recent years – although it is uncertain just how closely this is linked to the carbon tax and rebate scheme – its efforts to encourage higher levels of consumer spending were less successful. Austria’s chancellor, Christian Stocker, explained, “It was also a compensation payment to maintain disposable income. And when it was sent to Austrians, the money remained in savings accounts at banks. It did not go into consumption. And therefore, the effect we expected was not achieved.”
In North America, Canada also introduced a carbon tax scheme, although there are mixed feelings about its success rate. In 2018, the then Prime Minister Justin Trudeau introduced the “pan-Canadian climate framework”, which was modelled on British Columbia’s pioneering carbon tax. As in Austria, the scheme aimed to collect the carbon tax and return the funds to consumers in the form of a quarterly rebate. The government said that a family of four in Ontario would receive around $811, while a family in a rural region could expect $973, and a family in Alberta province would get around $1,564.
However, in October, the new Conservative government said it wanted to hold a referendum on the tax, suggesting that the initiative increased the economic burden on Canadians at a time when they were facing rising consumer costs. However, not everyone agrees with this assessment of the tax.
Kathryn Harrison, a political scientist at the University of British Columbia, explained, “The current political discourse means a lot of Canadians misunderstand how the policy affects them. They don’t think it works. They think they’re paying more than they are. And that’s a very distressing thing for me, from not just a climate policy perspective, but a democratic perspective.” Harrison added, “This isn’t a debate about how much emphasis to put on one issue or another. The unpopularity of the carbon tax is, to a large degree, driven by voters misunderstanding it and having the facts wrong.”
In April this year, the Conservative government axed the carbon tax, with wide support from Canadians who did not want to pay an additional tax. However, Werner Antweiler, an economist from the University of Sauder, believes this could have a negative impact on both emissions and consumer wealth.
Antweiler explained, “Carbon pricing was poorly understood and poorly communicated. Although most of the revenue was returned to households—through rebates or tax cuts in places like B.C.—many people only noticed higher fuel prices and ignored the money coming back. The policy felt like a tax, and that made it unpopular. Ironically, now that it’s gone, many lower-income households will be worse off.”
Carbon taxes in Austria and Canada have faced different challenges. In the Central European country, tax rebates were ultimately deemed too costly to keep up during a time of recession, while in the North American state, many taxpayers were less open to paying an additional tax, even if it could provide a long-term economic benefit. However, the two initiatives demonstrate that a carbon tax and rebate system has the potential to help change consumer habits and reduce GHG emissions.
