Your essential guide to climate finance

A carbon tax is designed to reduce greenhouse gas emissions by placing a direct price on CO₂ and other greenhouse gases.

A carbon tax is grounded in the concept of the social cost of carbon. This is an estimate of the economic damage caused by emitting one tonne of CO₂, including climate-related health, infrastructure and ecosystem impacts.

A carbon tax is typically levied per tonne of CO₂ emitted. The tax can be applied either upstream (on fossil fuel producers) or downstream (on consumers or power generators). This makes carbon-intensive activities more expensive, it incentivises nations, businesses and people to reduce their emissions, while untaxed renewable energy becomes more competitively priced and appealing.

Carbon tax was first introduced by Finland in 1990. Since then, more than 39 jurisdictions have implemented similar schemes. According to the World Bank, carbon pricing mechanisms (that’s both carbon taxes and emissions trading systems) now cover about 24% of global emissions. The remaining 76% are not priced, mainly due to limited coverage in both sectors and geographical areas, plus persistent fossil fuel subsidies. Expanding coverage would require extending carbon pricing to sectors like agriculture and transport, phasing out fossil fuel subsidies and strengthening international governance.

What is carbon tax?

Sweden has one of the world’s highest carbon tax rates and has cut emissions by 33% since 1990 while maintaining economic growth. The policy worked because Sweden started early, applied the tax across many industries and maintained clear, consistent communication that kept the public on board.

Canada introduced a national carbon tax in 2019. In Canada, most of the revenue from carbon taxes is returned directly to households through annual rebates, making the scheme revenue-neutral for most families. However, despite its economic logic, inflation and rising fuel prices led to public discontent – especially as many citizens were unaware they were receiving rebates.

Carbon taxes face challenges including political resistance, fairness concerns and low public awareness. Their success depends on clear communication and visible reinvestment of revenues into climate or social goals. A 2025 study that surveyed 40,000 people in 20 countries found that support for carbon taxes increases significantly when revenues are used for environmental infrastructure, rather than returned through tax rebates.

By Meilan Yan, associate professor and senior lecturer in financial economics, Loughborough University

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Notes for editors

Press release reference number: 25109

Loughborough is one of the country’s leading universities, with an international reputation for research that matters, excellence in teaching, strong links with industry, and unrivalled achievement in sport and its underpinning academic disciplines.

It has been awarded five stars in the independent QS Stars university rating scheme and named the best university in the world for sports-related subjects in the 2025 QS World University Rankings – the ninth year running.

Loughborough is ranked 7th in The UK Complete University Guide 2026, 10th in the Guardian University League Table 2025 and 10th in the Times and Sunday Times Good University Guide 2025.

Loughborough was also named University of the Year for Sport in the Times and Sunday Times Good University Guide 2025 - the fourth time it has been awarded the prestigious title.

Loughborough is consistently ranked in the top twenty of UK universities in the Times Higher Education’s ‘table of tables’, and in the Research Excellence Framework (REF) 2021 over 90% of its research was rated as ‘world-leading’ or ‘internationally-excellent’. In recognition of its contribution to the sector, Loughborough has been awarded seven Queen's Anniversary Prizes.

The Loughborough University London campus is based on the Queen Elizabeth Olympic Park and offers postgraduate and executive-level education, as well as research and enterprise opportunities. It is home to influential thought leaders, pioneering researchers and creative innovators who provide students with the highest quality of teaching and the very latest in modern thinking.