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Regular version of the site

‘Green’ Taxes

An Analysis of Climate Policy Effectiveness


It is believed that carbon dioxide emissions into the atmosphere are mainly regulated by ‘direct’ economic instruments - the carbon tax and the Emissions Trading System (ETS). However, a comparative analysis has shown that ‘indirect’ instruments, such as excise taxes on motor fuel and other energy taxes, did not yield any lesser impact than their ‘direct’ counterparts, and, over time, were even more effective. This is the conclusion drawn by HSE researcher Ilya Stepanov in his article, ‘Taxes in the Energy Sector and Their Role in Reducing Greenhouse Gas Emissions’.


In 2015, 197 countries signed (and the majority have already ratified) the Paris Agreement, thereby enacting the world community’s pledge to move towards low-carbon development. This transition marks a major change for the energy sector, which is responsible for two thirds of the world’s greenhouse gas emissions. The efficiency of energy production is gradually increasing, and conditions of inter-fuel competition are changing in favor of low-carbon energy sources.

A widely held belief in the scientific literature is that the price of carbon plays a major role in climate policy. It is determined either by an appropriate tax, or through the Emissions Trading System (ETS). Both methods are considered ‘direct’ economic instruments of climate policy, but they appeared relatively recently.

Initially, the use of fossil fuels was regulated exclusively by energy taxes. The first duties on gasoline appeared in Denmark and Sweden in 1917 and 1924, respectively. Since 1957, fiscal policy has become extended to other types of hydrocarbons, including petroleum products and coal. The main purpose of energy taxes was to regulate the import of energy resources, as well as to ensure stable revenue for the state budget. Environmental motives began to appear only in the 1980s. European countries are the world’s leaders of ‘green’ taxation. At first, the emphasis in fiscal regulation was made on combating local air pollution, and later on global climate change. Carbon regulations were first implemented in the 1990s, and they were actively distributed only in the last decade.

The first carbon tax was introduced in Finland in 1991. Today, the tax is collected in 16 European countries. The world's first emissions trading system was launched in 2005. Initially it covered 24 European countries; now it includes 31.

Indirect vs Direct Instruments

The fundamental difference between energy taxes and a carbon tax or the ETS is that energy taxes only indirectly contribute to reducing greenhouse gas emissions. If the ‘direct’ rate is calculated per unit of emissions, then the ‘indirect’ rate is set in proportion to the amount of energy used, and not the proportion of carbon contained in it.

‘Indirect’ taxes are applied much more widely than ‘direct’ taxes, covering more sectors of the economy and sources of emissions. If energy tax rates were to be changed, the impact on reducing greenhouse gas emissions might be greater than that of ‘direct’ regulatory measures.

In the EU, most of the energy taxation comes from the transport industry. Taxes and excise taxes on motor fuels (diesel, gasoline, kerosene, fuel oil, etc.) form the bulk of tax revenue from the ‘indirect’ regulation of greenhouse gas emissions.

The role of taxes on energy products in the EU has a fundamental impact on the development of the industry. ‘The share of excise taxes on gasoline and diesel in the final cost of production amounts to more than 30% on average, and for some European countries it is above 50%,’ the author writes.

For most European countries, ‘indirect’ measures generate more tax revenue than direct ones. In Norway, they generate almost 1.5 times more; in Sweden, almost twice more; and in Denmark, more than 5 times more. This is due to the fact that ‘direct’ regulatory instruments still have relatively limited coverage. On average, in European countries, the carbon tax covers no more than 25% of carbon dioxide emissions, and the ETS covers only 45%.

The Study

To understand which fiscal instrument is more effective in reducing greenhouse gas emissions, Ilya Stepanov analyzed panel data for 30 European countries from 1995 to 2016.

The researcher first calculated the so-called ‘explicit’ carbon price for each country. It consists of a carbon tax, the ETS and a collection of other energy charges. He found that the greatest tax burden on carbon dioxide emissions from burning fossil fuels is in Sweden, Finland, Denmark and Malta. In these countries, the ‘explicit’ carbon price reaches 96 to 117 euros per ton of CO2. The lowest fiscal burden was found in Poland (37 euros per ton), Bulgaria (27 euros/ton) and Hungary (4 euros/ton).

‘Countries with a low fiscal burden on greenhouse gas emissions have GDPs with a high carbon intensity, while countries with a high ‘explicit’ carbon price have the opposite,’ the author observes.

Stepanov analyzed how changes in different components of the ‘explicit’ carbon price affected carbon dioxide emissions. The results showed that both ‘direct’ and ‘indirect’ price signals negatively affect the carbon intensity of a country’s GDP. Thus, an increase in ‘direct’ fiscal instruments by 1% during 1995–2016, on average, led to a reduction in the carbon intensity of a country’s GDP by 2.3%. For comparison, an increase of 1% in ‘indirect’ price signals resulted in a 4% reduction in the carbon intensity of GDP.

However, when comparing the results of an analysis of the periods of 1995 to 2016 and 2005 to 2016, the difference in the impact of ‘indirect’ and ‘direct’ fiscal instruments becomes less significant. The researcher connects this with the introduction of the European Emissions Trading System in 2005 and the spread of the carbon tax to a greater number of countries.


Ilya Stepanov, Junior Researcher Fellow, Centre for Comprehensive European and International Studies, HSE
August 01, 2019