Commonwealth Carbon Tax Model Law
02 April 2024



Author: Dr Daniel Wilde, Economic Adviser

At last year’s UN climate summit (COP28), the world committed to transitioning away from fossil fuels and reaffirmed its commitment to limiting global warming to 1.5 degrees Celsius.

But business-as-usual will not achieve these goals. Greenhouse gas emissions continue to rise, forecasted emissions are higher than the carbon budget consistent with limiting climate change to 1.5 degrees Celsius, and given current policies, fossil fuel production is expected to continue increasing. Countries need to implement new policies if they hope to tackle climate change.

Carbon taxation is one such policy. The idea is simple: tax emissions and incentivise emitters to clean up their act by transitioning to clean energy and/or reducing their energy consumption. Carbon taxation offers the triple benefit of reducing emissions, boosting investment in clean energy, and increasing government revenues.

Yet carbon taxation, and carbon pricing generally, can be politically fraught. In 2012 Australia introduced a carbon pricing scheme that was subsequently ended by the next administration who argued that it was causing electricity prices to increase. In the United States, political constraints to the federal government taxing carbon was also a motivation behind the subsidy-driven approach to reducing emissions taken by the Biden administration in the Inflation Reduction Act.
Carbon pricing is on the rise

Despite examples of political opposition, carbon pricing is an increasing global trend. The World Bank, State and Trends of Carbon Pricing 2023 for example, reports that while a decade ago only 7 per cent of global emissions were priced, today this has risen to nearly a quarter of global emissions being priced through either a carbon tax or an emissions trading scheme.

The EU Carbon Border Adjustment Mechanism, which comes into force in 2026, is further increasing demand for carbon taxation. Under this mechanism, imports of carbon-intensive goods (initially aluminium, cement, electricity, fertilizer, hydrogen, iron and steel) will be charged, while carbon taxes paid on these goods during their production will be creditable, thereby reducing the amount paid to the EU.

Countries exporting these goods to the EU then face a question: should the carbon in these goods be taxed domestically or by the EU (in which case the EU will receive the revenue)? The UK is also committed to introducing a carbon border adjustment mechanism, which will provide further motivation for carbon taxation in countries that export carbon-intensive goods to the UK.



Commonwealth Carbon Tax Model Law

The benefits of carbon taxation have motivated a growing number of Commonwealth countries such as Botswana, Gabon, Malaysia and Nigeria to consider taxing carbon. In response, the Commonwealth Secretariat has drafted a Carbon Tax Model Law to aid those Commonwealth countries considering carbon taxation as part of their climate policy.

This model law is consistent with the key principles of international environmental law, including the ‘polluter-pays’ principle. The individual parts and sections of the model law have been drafted to ensure clarity around the legal obligations and rules, and to ensure transparency and procedural fairness in carbon taxation.

If implemented globally, the model law would cover approximately 79 per cent of global greenhouse gas emissions and is likely to tax the majority of emissions in most countries. This contrasts with the much lower coverage achieved by existing carbon taxes and shows that the model law could be a powerful tool for reducing emissions. The high coverage of the carbon tax would be achieved by taxing emissions from three sources: the burning of fossil fuels, industrial processes such as cement production, and the venting of methane.

The model law also provides for an easy to administer carbon tax. The tax is levied on fossil fuel companies and large industrial emitters, which are sizeable and sophisticated taxpayers that are well-placed to meet reporting requirements. Households, small businesses, and most companies are not legally liable for the carbon tax and would not have to fill in any new forms or face any change in the administration of their taxes due to the carbon tax, albeit they may bear part of the economic burden of the tax through higher prices.

To ensure a just transition, the model law includes provisions for measuring and mitigating the carbon tax’s impact on low-income households and other vulnerable groups. This is achieved through regular impact reporting, stakeholder engagement and directing revenue generated from the tax towards clean energy initiatives and/or low-income households. These measures are also important to build public support for the carbon tax.

It is clear that demand for carbon taxation is growing as countries strive to achieve their global commitments, increase domestic revenues, and avoid carbon border adjustment mechanism taxes on their exports. The Commonwealth Carbon Tax Model Law is designed to provide countries with a tool for implementing carbon tax that’s comprehensive, easy to administer and consistent with a just transition.