Discussion Paper

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How do governments set the carbon tax rate? A comparative analysis

Dominioni, Goran / Daniele Malerba.
Discussion Paper (7/2026)

Bonn: German Institute of Development and Sustainability (IDOS)

ISBN: 978-3-96021-294-2

Over 30 national jurisdictions around the world have adopted a carbon tax. The tax rate is one of the key aspects of the design of carbon taxes, determining environmental effectiveness,
competitiveness, carbon leakage risks and revenue raised. This article sheds new light on the criteria countries use to set the tax rate in their domestic instruments. To do so, we first outline a taxonomy of criteria that governments can use in setting the tax rate and then provide a comparative analysis of the criteria actually used by 13 jurisdictions to set this rate.
We find that empirically driven criteria, such as marginal abatement cost curves (MACCs) and the social cost of carbon (SCC), are rarely used to determine the tax rate. Few countries use
MACCs to set their carbon tax rate and such use is always combined with other criteria. Overall, carbon tax rates are mostly set based on evaluations that transcend purely empirical estimates. In addition, the Nobel Prize-winning idea of the SCC is not used in any documents published by the countries analysed, despite the fact that it can be adapted to suit political preferences. The common description of carbon taxes as instruments that primarily aim to internalise externalities does not reflect their implementation in practice. A corollary of this finding is that scholarship that criticises carbon taxes for embedding a cost-benefit analysis approach to climate policy simply condemns these instruments for being something they are not. Our analysis also indicates that emulation and competition play an important role in setting the tax rate, as governments copy price levels implemented in other jurisdictions or supranational carbon pricing instruments. This has implications for the design of carbon taxes in the current geopolitical situation, as changes in the tax rate in one jurisdiction may spill over into others.

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