• Service: Tax
  • Type: Survey report
  • Date: 4/25/2013

Carbon & climate change 

Almost all the 21 countries analyzed for the Index have some sort of carbon-related tax mechanism in place. However, each country is unique in the way that it manages its policy response to climate change and carbon emissions reduction and, as a result, the use of tax penalties and incentives varies widely.
UK 1
Australia, Finland, South Korea 2

Source: The KPMG Green Tax Index, 2013.

True carbon taxes are currently the exception rather than the rule. Australia has implemented a carbon price mechanism which has a fixed price for the first 3 years, and will then transition to a flexible price trading scheme in 2015. South Africa is close to bringing in its own carbon tax and China has committed to do so but delayed its implementation.

Carbon-based tax penalties on high-emission fuels and energy sources, such as gasoline and coal, are more frequently implemented. Also, increasingly seen are emissions trading systems (ETS) whether international, such as the EU ETS, sub-national such as the provincial trading systems being developed in China, or municipal, such as Tokyo’s cap-and-trade program. While cap-and-trade systems are not technically taxes, they have been included in this Index as they have become the de-facto alternative carbon penalty to carbon tax.

The message for corporations is that carbon and climate change-related tax penalties and incentives are proliferating around the world. They can be complex to manage and the chances of escaping such changes in a global economy are becoming more remote. In the long term corporations are likely to be subject to some form of carbon limitation penalties or incentives wherever they operate. Complying with penalties and limiting financial exposure requires careful management.


As well as participating in the EU’s ETS, the UK imposes the Climate Change Levy — an environmental tax levied on electricity, gas, solid fuels including coal and liquefied petroleum gas (LPG). The levy is designed to encourage energy efficiency to help the UK meet its targets for cutting greenhouse gases (GHGs), including carbon dioxide (CO2) emissions.

Energy intensive industries may receive up to a 90 percent discount on the Climate Change Levy in return for meeting energy efficiency or carbon-saving targets as part of Climate Change Agreements (CCAs). Eligible sectors for CCAs include steel, chemicals, cement and agricultural businesses, such as intensive pig and poultry-rearing.

The UK’s Carbon Price Floor (CPF) is a tax on emitting CO2 paid by electricity generators. It is intended to provide an incentive to invest in low-carbon power generation by providing greater support and certainty to the carbon price. The CPF was introduced from 1 April 2013 at around GBP15.70/ton(t)CO2 (USD25.51/tCO2) and will increase at a linear rate to GBP30/tCO2 (USD48.74/tCO2) in 2020, and to GBP70/tCO2 (USD113.74/tCO2) in 2030.

In addition, large businesses in the UK that consume a certain amount of energy must participate in the Carbon Reduction Commitment Energy Efficiency Scheme (CRC). This scheme is designed to target CO2 emissions not already covered by CCAs and the EU's ETS.

Organizations eligible for the CRC must buy allowances for the energy they use (electricity, gas, gasoline, diesel or other fuels) and penalties for non-compliance are significant.

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Australia’s carbon price mechanism was passed by parliament on 8 November 2011 and commenced on 1 July 2012. The Australian government expects the tax to drive innovation and investment in clean technology.

In January 2013, it was reported that carbon emissions from Australia’s electricity sector had fallen sharply under the first 6 months of the tax with increases in energy efficiency and renewable energy generation. It was also reported that the government’s revenues from the tax will be less than expected due to the drop in emissions.1

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Finland’s carbon tax applies to multiple industries. This tax is based on the CO2 emissions of fuels including gasoline, diesel, biofuels, coal, coal brickets and solid fuels, but not wood or other biomass used in energy production.

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South Korea

Since the establishment of the Presidential Committee on Green Growth in 2009, South Korea enacted the Framework Act on Low Carbon Green Growth and introduced a national GHG emissions target management scheme. The Ministry of Environment sets the maximum limit of GHG emissions and related authorities supervise performance of companies in the scheme. Whenever companies exceed GHG emissions, the Ministry of Environment imposes penalties.

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China has determined the amount of its tax penalty, eventually expecting to introduce a levy of CNY5-CNY10 (USD0.80 to USD 1.61) per ton of carbon. The tax was proposed in China’s latest Five-Year Plan and is intended to apply to carbon emissions from fossil fuels. However at the time of drafting this report, the country had delayed implementation of the program.2

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Other carbon tax penalties

India’s carbon tax is specific to coal only and was first introduced in July 2010. It imposes a tax of 50 Indian rupees (INR) (USD1.07) per ton of coal produced or imported into India. The revenue raised is earmarked for the National Clean Energy funds for research and innovation in clean energy technologies and environmental remedial programs.

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South Africa’s carbon tax program, though not yet in force, is close to completion at the time of writing this report, and implementation is likely in 2015. The country’s 2013-14 budget review proposed that the tax will initially be levied at ZAR120 (USD13) per ton of CO2 and will increase by 10 percent per annum during the first implementation period of 2015-2020.

A benchmark of carbon emissions per unit of output has been proposed, and may be defined at an industry sector or sub-sector level.

Companies that emit less CO2 than the benchmark will receive additional tax-free allowances, whilst those performing below the standard will have their free allowances reduced.

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Japan enforces an additional tax on petroleum and coal (on top of its petroleum and coal tax) based on carbon emissions. This additional tax is part of the Japanese government’s Carbon Dioxide Tax of Global Warming Countermeasure in the 2012 tax reform, which aims to control energy-originated CO2.

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Sub-national carbon taxes

Subnational carbon taxes exist in Canada and the US, among others. For example, Quebec introduced a carbon tax on certain fuels in 2007. In 2008, British Columbia followed with a tax that applies to the purchase or use of fuels within the province. The state of California recently enacted a carbon tax at an initial rate of USD10 per ton of carbon content on coal, petroleum and natural gas. The tax will increase by USD10 each year, freezing when a mandated report by the Internal Revenue Service and the Department of Energy determines that CO2 emissions have decreased by 80 percent from 1990 levels.

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Cap-and-trade systems

Cap-and-trade systems are more widely used by governments than carbon taxes. Of the 21 countries analyzed for this Index, 12 (Australia, Belgium, Finland, France, Germany, India, Ireland, South Korea, the Netherlands, Singapore, Spain, and the UK) have a national system of some sort or participate in an international carbon trading system.

Sub-national cap-and-trade programs exist in Canada, China (expected to be implemented in 2013), Japan and the US.

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Carbon sequestration incentives and penalties

Carbon sequestration incentives are uncommon, although a few countries do provide benefits.

Australia's Carbon Farming Initiative (CFI) allows farmers and land managers to earn carbon credits by storing carbon or reducing GHG emissions on the land. These credits can then be sold to people and businesses wishing to offset their emissions. The CFI also helps the environment by encouraging sustainable farming and providing a source of funding for landscape restoration projects. The CFI is a carbon offsets scheme that is part of Australia's carbon market. Legislation to underpin the CFI was passed by Parliament in August 2011.

The US allows a tax credit for CO2 sequestration of USD10.44 per metric ton (2012 rate) for CO2 used as a tertiary injectant and then permanently sequestered; USD20.88 (2012 rate) for CO2 permanently sequestered without first being used as tertiary injectant. This incentive will close in the year in which the Internal Revenue Service determines that 75 million metric tons of CO2 have been captured and sequestered.

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1 Accessed 21 March 2013.

2 Accessed 25 March 2013.


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