Uruguay has the highest carbon tax rate worldwide as of March 31, 2023, at nearly 156 U.S. dollars per metric ton of CO₂ equivalent (USD/tCO₂e). By comparison, Poland had a tax rate of less than one USD/tCO₂e, while Finland – the world's first country to implement a carbon tax – had a rate of some 84 USD/tCO₂e. Despite being the most expensive across the globe, Uruguay’s carbon tax covered only about 11 percent of the greenhouse gas emissions in the country.
How do carbon taxes work?
Carbon taxes are a type of environmental tax, typically levied on fossil fuels and certain high-polluting industrial processes. Governments set a price per unit of carbon emitted, which can vary depending on the jurisdiction and may be set by legislation or through a market-based mechanism. The revenue generated from carbon taxes can be used in various ways, such as investing it in renewable energy projects or climate adaptation initiatives. Altogether, carbon taxes aim to ensure that big polluters bear the costs of their environmental impact while providing an economic incentive to reduce their carbon footprint.
Emissions trading systems (ETS)
ETS are one of the main carbon pricing instruments worldwide. They work on a cap-and-trade principle, which limits the emissions a participant can produce each year through allowances. These can be allocated through various methods, such as auctions, free allocation based on historical emissions, or a combination of both. In addition to that, entities are also allowed to buy and sell allowances among themselves in a regulated market.