Overview Emissions of carbon dioxide (CO2) from the burning of fossil fuels along with other greenhouse gases are causing dangerous changes in the global climate with average temperatures increasing everywhere. Recent climate disasters around the world underline the urgent need to rapidly reduce emissions as agreed by the world’s nations in the 2015 Paris Agreement. The Asia–Pacific region has seen its emissions increase considerably over the past 2 decades, with numerous countries now matching or even exceeding the European Union and the United States in per capita emissions. To keep the average global temperature from exceeding 1.5–2 degrees Celsius stronger policy instruments are needed. Carbon taxation is an essential tool in any policy portfolio of measures and instruments to tackle global warming. The experience of OECD countries shows the significance of providing unambiguous price signals to all market actors to underpin the need to decarbonize by gradually increasing taxation or pricing of carbon and its greenhouse equivalents. The Asian Development Bank’s (ADB) policy brief on carbon taxation provides a step-by-step guide to policy makers and their advisors on how to introduce a carbon tax. It provides references and hyperlinks to further readings and studies of relevance. It is a must-read for government officials, members of parliament and many others. Summary The United Nations is calling for emissions to be reduced by 45% by 2030 to limit global warming. According to studies from the International Monetary Fund, a carbon tax rate of $25 per ton CO2 is the approximate level to aim for by 2030 to curb emissions in emerging and developing economies. At this rate, the price of using coal, the most carbon-intensive of all fuels, is likely to increase by about 50%. Other fuels and gases will also become more expensive, providing low-carbon energy with improved leverage in the market. Unlike an increase in the market prices of energy, revenues from a carbon tax will remain in the domestic economy. The revenues generated will be substantial and can be used to lower other taxes on business and households. A smaller share could be devoted to support low-income households and low-carbon energy technologies, as opted for by Singapore. Advanced economies may have to aim for tax rates of $75 or more by 2030. To have the appropriate price on carbon and greenhouse gas emissions in place by 2030, countries need to begin soon, gradually ramping up the carbon tax rate from an introductory rate. Several Latin American countries have recently started out with carbon taxes of up to $ 5per ton CO2, while South Africa’s government has announced increasing its carbon tax from $9 by at least $1 annually to reach $30 by 2030. Many countries combine carbon taxes with emissions trading systems for the largest emitters of power plants and industry. Smaller businesses, households, and transport fuels, on the other hand, are more easily addressed with a carbon tax. Uruguay has recently transformed its excise taxes on motor fuels into a carbon tax. Many countries in the Asia–Pacific have excise taxes on fuels that could be adjusted and extended into a more comprehensive carbon tax. Moreover, only an explicit carbon price will be credited for exports into the European Union, where carbon emissions certificates must be purchased for certain carbon-intensive goods (e.g., steel, aluminum) from 2026. ADB’s policy brief identifies 10 elements in the process of preparing and introducing a carbon tax. Identify the mitigation gap and priority sectors. Carbon taxation can help close the gap between business-as-usual trends in greenhouse (GHG) emissions and the reduction targets pledged by countries in their nationally determined contributions (NDCs). The sectors that contribute most significantly to national emissions are strong candidates for a carbon tax. Identify greenhouse gases to be taxed. There are GHGs other than CO2 that have large global warming potential. These include industrial F-gases hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Assess implications for specific fuels and risks of carbon leakage. Carbon leakage is when producers in countries with a carbon price lose market share to producers in countries without one. Assess distributional impacts. Study the potential impacts of carbon taxation on income groups and on urban and rural households. Calibrate the carbon tax rate. Incrementally raising the tax from an initially modest rate can give polluters time to adjust, help overcome political resistance, and enable learning on mitigation options. Determine scope for reductions or exemptions. To avoid complete exemptions, different methods can be used, such as carbon offsets and tax-free emission allowances. Determine compensations to low-income households. Explore ways to ease the burden of carbon taxation on low-income households by providing targeted assistance. Assess macroeconomic impacts. All revenue from carbon taxation remains within the domestic economy and may be recycled to lower income and payroll taxes, fund R&D programs for green technology, and other activities to support a just transition. Determine institutional oversight. Successful carbon taxation schemes require constructive collaboration between environmental and tax authorities. Establish monitoring for ex-post evaluation. Build a framework for examining the realized benefits of the carbon taxation policy to improve understanding of how it affects households and companies. The policy brief further explains how economic and other expertise can be involved and suggests extensive stakeholder consultations. Resources Asian Development Bank. 2023. Carbon Pricing and Fossil Fuel Subsidy Rationalization Tool Kit. Manila. Ask the Experts Mikael Skou Andersen Professor, Department of Environmental Science, Aarhus University Mikael Skou Andersen is a full professor of environmental policy analysis at Aarhus University in Denmark, where he obtained his PhD as a visiting scholar to Science Center Berlin. He is a member and vice-chair of the Scientific Committee of the European Environment Agency. He is the author of Governance by Green Taxes (1994). He has researched carbon pricing for more than 25 years. He is co-organizer of the annual Global Conference on Environmental Taxation. Asian Development Bank (ADB) The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 69 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Follow Asian Development Bank (ADB) on Leave your question or comment in the section below: View the discussion thread.