Carbon tax: how it works, rates by country and whether it cuts emissions

What is a carbon tax?

A carbon tax is a fee set by a government on each tonne of carbon dioxide (CO2) emitted. It is usually collected on coal, oil and gas in proportion to their carbon content, which makes fossil fuels more expensive and low-carbon alternatives more competitive. Unlike emissions trading, the price is fixed by law rather than by a market.

The logic is simple: burning fossil fuels imposes a cost on everyone — through the greenhouse effect and the global warming it drives — but that cost does not appear on any bill. A carbon tax puts it there. The more CO2 a fuel or product generates, the more tax it carries, nudging households and businesses towards cleaner choices.

Economists call this a Pigouvian tax, and it applies the polluter pays principle: whoever creates the damage pays for it, instead of passing the bill to society at large.

How does a carbon tax work?

In practice, a carbon tax follows three steps:

1. 1
   The government sets a price per tonne of CO2 — for example SEK 1,520 (about €138) in Sweden or CHF 120 in Switzerland in 2026 — and usually a trajectory for how it will rise over time;
2. 2
   The tax is collected on fuels in proportion to their carbon content: coal pays more than oil, oil more than gas, and zero-carbon energy pays nothing;
3. 3
   The revenue is recycled — into general budgets, green investment or direct rebates to households, depending on the country.

Upstream or downstream collection

A carbon tax can be levied at two points in the economy:

• Upstream, on the sale of fossil fuels themselves. Since the CO2 released by burning a litre of petrol or a cubic metre of gas is known precisely, this is cheap to administer and is how almost every real-world carbon tax works;
• Downstream, on the emissions embedded in finished products and services. This would target consumption more accurately but requires complex carbon accounting for every product, so it is rarely used.

What happens to the money?

According to the World Bank’s State and Trends of Carbon Pricing 2026, carbon pricing raised over $107 billion for public budgets in 2025. How that money is used largely determines whether a tax is accepted by the public. Switzerland redistributes around two thirds of its CO2 levy back to residents and businesses via health-insurance rebates; Sweden pours it into the general budget while cutting other taxes; many governments earmark part of it for renewable energy and building renovation.

Carbon tax vs emissions trading (ETS): what is the difference?

A carbon tax is one of two ways to put a price on carbon. The other is an emissions trading system (ETS), also called cap-and-trade: the government caps total emissions, issues a matching number of allowances, and lets companies buy and sell them. The tax fixes the price and lets emissions adjust; the ETS fixes the quantity of emissions and lets the price adjust.

The two tools are often combined. The EU ETS, launched in 2005, covers power stations, heavy industry, aviation and — since 2024 — maritime transport, while several member states add national carbon taxes on the sectors the ETS misses, such as home heating and road fuel. Emissions from installations covered by the EU ETS have fallen by around 50% since 2005.

Carbon tax rates by country in 2026

Rates vary enormously — from a few dollars to almost $160 per tonne — and so does coverage: a high headline rate can apply to a tiny slice of a country’s emissions. Here are the landmark carbon taxes as of July 2026:

Is there a carbon tax in the UK?

The UK has no economy-wide carbon tax. Instead, it prices carbon through three overlapping instruments: the UK Emissions Trading Scheme, the Carbon Price Support levy on electricity generators, and fuel duty on petrol and diesel. A fourth — a UK carbon border tax — arrives in 2027.

The UK ETS

Before Brexit, the UK belonged to the EU ETS. Since May 2021 it has run its own UK ETS, a cap-and-trade market covering energy-intensive industry, power generation and aviation — broadly, installations that burn fuel with a rated thermal input above 20 MW. The cap falls each year in line with the UK’s legally binding net zero by 2050 target. The official UK ETS carbon price for the 2026 scheme year is £49.41 per tonne.

Carbon Price Support and fuel duty

On top of the ETS price, fossil-fuel power stations in Great Britain pay the Carbon Price Support, a tax of £18 per tonne of CO2, frozen at that level since 2015-16. This “top-up” is widely credited with accelerating the near-elimination of coal from British electricity — the UK’s last coal-fired power station closed in September 2024. Ordinary drivers, meanwhile, pay an implicit carbon price through fuel duty, although it is not calculated on carbon content.

A UK carbon border tax from 2027

From 1 January 2027, the UK will introduce its own carbon border adjustment mechanism (CBAM): imports of aluminium, cement, fertilisers, hydrogen, iron and steel will pay a charge reflecting the carbon price they would have faced if produced in the UK. The goal is to stop “carbon leakage” — production simply relocating to countries with weaker climate rules.

Do carbon taxes actually work?

Mostly yes — where the price is high enough and the coverage broad enough. The debate is no longer really about whether carbon pricing cuts emissions, but about whether current prices are high enough to cut them fast enough.

What the evidence shows

The best-studied case is Sweden. A landmark study published in the American Economic Journal: Economic Policy found that Sweden’s carbon tax cut transport emissions by almost 11% relative to what they would otherwise have been — while the economy kept growing. In British Columbia, studies found the province’s carbon tax reduced manufacturing and transport emissions by roughly 4-5%. And in Europe, emissions from sectors covered by the EU’s carbon price have halved since 2005.

The caveat: many of the world’s 87 instruments price carbon far below the level economists consider effective, so their measured impact is modest. Coverage is also incomplete — around 70% of global emissions still carry no carbon price at all, including those of many of the most polluting countries.

Advantages of a carbon tax

• It makes the polluter pay and corrects a market failure: the climate damage of fossil fuels finally shows up in their price;
• It raises substantial revenue — over $107 billion worldwide in 2025 — that can fund green energy, home insulation or rebates for low-income households;
• It gives businesses a predictable price, unlike volatile ETS markets, making long-term clean investment easier to plan;
• It is technology-neutral and cheap to administer: it piggybacks on existing fuel-tax systems rather than regulating each product separately.

Disadvantages of a carbon tax

• It is regressive by default: poorer households spend a bigger share of income on heating and fuel, so without rebates they are hit hardest;
• It is politically fragile: France froze its tax after the yellow-vest protests and Canada abolished its consumer charge in 2025;
• Applied alone, it risks carbon leakage — firms shifting production to countries with no carbon price — which is exactly what border mechanisms like CBAM try to fix;
• Unlike a cap, it offers no guarantee on the emissions outcome: if demand for fossil fuels proves stubborn, pollution can stay high despite the tax.

One thing a carbon tax is not: a licence for companies to look green without changing anything. Paying a carbon price, or buying cheap offsets, is sometimes dressed up as climate action — a classic form of greenwashing when it is not backed by genuine emission cuts.

Carbon border taxes: the EU’s CBAM and what comes next

The newest frontier of carbon taxation sits at the border. The EU’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive regime on 1 January 2026: importers of iron and steel, aluminium, cement, fertilisers, hydrogen and electricity must now report the embedded emissions of their goods and, from February 2027, buy CBAM certificates priced on the EU ETS — €75.36 per tonne for the first quarter of 2026. In effect, it extends Europe’s carbon price to the rest of the world’s exporters.

Inside the EU, carbon pricing is also about to reach households: ETS2, a second emissions trading system covering heating and road-transport fuels, will start in 2028 after EU ministers agreed in November 2025 to delay it by a year, with a price-containment mechanism triggered around €45 per tonne (in 2020 prices) in its early years. For most Europeans, it will be the first time a carbon price appears — indirectly — on their heating bill and at the pump.

Cut your carbon footprint before the taxman does

You do not need to wait for a CO2 tax on your bills to act. The same behaviours a carbon tax is designed to encourage also cut your costs today:

• Walk, cycle or take the train where you can, and share car journeys for longer trips;
• Buy local food and eat less meat — food miles and livestock are two of the biggest levers in a household footprint;
• Trim your energy use: LED bulbs, unplugging idle appliances and turning the thermostat down 1°C all reduce your electricity bill as well as your emissions;
• Choose a green tariff from a green energy supplier, and offset the emissions you cannot avoid.

Read all our guides on how to reduce your carbon footprint — and how public opinion is shifting: a poll by campaign group Zero Carbon ahead of the COP26 summit found that two thirds of Britons saw a carbon tax as a fair way to raise money, provided poorer households are protected.