International carbon taxes: Should everyone pay for environmental damage?

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  Quantumrun Foresight
• September 28, 2023

Insight summary

The European Union's proposed carbon tax on high-emission goods aims to encourage greener business practices. However, it faces several challenges, including measurement issues and the risk of encouraging protectionism. While the tax could generate funds for environmental projects, there's concern over its impact on international trade and how the revenue would be globally allocated. Countries like the U.S. and China are considering their own measures or seeking exemptions. Despite the hurdles, there is broad agreement on the urgent need for carbon-based trade policies.

International carbon taxes context

International carbon taxes are fees levied on goods and services that emit greenhouse gases (GHGs), typically at the point of import or export. The idea behind them is to create a price incentive for businesses to reduce their emissions in a way that doesn’t unduly penalize countries with lower emissions profiles or those struggling economically. In general, carbon tariffs are tricky. While its intention is good, the political and economic implications can be thorny. Firstly, there are no clear guidelines for measuring carbon in goods and products. Secondly, tariffs, in general, can encourage protectionism, where a jurisdiction gives an unfair advantage to domestic players and keeps everyone out.

The International Monetary Fund (IMF) has suggested that instead of tariffs, there should be a standardized minimum carbon tax depending on the country’s gross domestic product (GDP). However, the consensus is that this is a pipe dream for now. Many think carbon taxes are a fair way to ensure that everyone pays for the damage they do to the environment. The money generated by these taxes is spent on various things, including the environment and community development. However, in a market where permits are tradeable, compensation would only exist if permits were initially allocated to the whole public and polluters were compelled to pay for them through an auction. But once firms acquire the certificates, they have the right to pollute more by purchasing permits from one another without reimbursing society at large.

Disruptive impact

There are several challenges to implementing and enforcing international carbon taxes. One is reconciling the various national interests at play; another is ensuring that the tax doesn’t create underhanded incentives, such as prompting companies to relocate their operations to countries with weaker environmental regulations. There is also the question of how the tax revenue would be distributed among countries. However, there is a broad consensus that international carbon taxes could play an essential role in mitigating climate change. They could help level the playing field between developed and developing countries, incentivize emissions reductions, and generate much-needed revenue for climate action.

However, the US, China, Brazil, India, South Africa, and some developing economies think the carbon tax can harm international trade. As a result, companies from these countries can choose to impose carbon taxes or other barriers to EU imports in retaliation. They can also create their own carbon tax scheme (the US and Canada are now considering it). Another potential reaction is these countries can open a World Trade Organization (WTO) dispute case against the EU. Finally, they can negotiate with the Union for certain exemptions. Whatever the long-term results of the international carbon tax, it’s clear that there’s an urgent need to create carbon-based trade policies. This includes agreeing on how to measure carbon in production and acknowledging that countries have different approaches to decarbonization.

Implications of international carbon taxes

Wider implications of international carbon taxes may include: 

• More countries creating (or at least considering) their own carbon tax schemes to protect their domestic market interests.


• Firms in the manufacturing and construction industries paying expensive taxes for their raw materials. This can result in these companies pulling out of certain markets.


• Increased discussions among countries to establish a standardized global carbon tax policy, including clarifying definitions and measures. Meanwhile, countries that do not participate in this international system will serve as carbon loopholes to other nations and multinationals not interested in participating.


• Companies passing the tax expense to customers, resulting in more expensive goods.


• Developing economies losing out as they struggle to keep their emissions low due to lack of technology and expertise.

Questions to consider

• How else can an international carbon tax affect products and services?


• What are the other potential political implications?