Carbon Taxes Can Reduce Emissions, but Policy Design Determines Their Effectiveness

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FORMOSA NEWS

MAKASSAR, Indonesia — Carbon taxes can help reduce carbon emissions, but their effectiveness depends heavily on how the policy is designed, implemented, and integrated with broader economic and climate measures. That is the central finding of a 2026 systematic literature review by Andi Nurul Azisah of the State University of Makassar (Universitas Negeri Makassar). The review examined 11 Scopus-indexed journal articles published between 2015 and 2026 and found that tax rates, sector coverage, exemptions, revenue use, trade exposure, economic structure, and emissions measurement all influence the results of carbon taxation.

The findings are relevant as governments increasingly consider carbon pricing as part of efforts to reduce greenhouse gas emissions and support the transition toward lower-carbon economies. The review suggests that simply introducing a carbon tax is not enough. Its environmental impact depends on what happens alongside the tax.

Why Carbon Taxes Matter

Carbon taxes place a financial cost on activities associated with carbon emissions. In principle, this can encourage companies and consumers to use energy more efficiently, shift toward cleaner energy sources, and invest in low-carbon technologies.

However, the review by Andi Nurul Azisah shows that the relationship between carbon taxes and emissions is more complex than a simple “higher tax, lower emissions” formula.

Evidence from different countries generally indicates that carbon taxes can contribute to lower emissions. At the same time, the size and durability of the reduction vary according to the design of the policy and the economic conditions in which it operates.

This means carbon taxation should be viewed as part of a broader fiscal and climate policy package rather than as a stand-alone solution.

From 119 Records to 11 Studies

Azisah used a systematic literature review based on the PRISMA 2020 framework. The literature search was conducted through Scopus, focusing on peer-reviewed English-language journal articles in Business, Management, and Accounting.

The search covered publications from January 1, 2015, to April 1, 2026, and initially identified 119 records. After screening titles, abstracts, and full-text articles, the final evidence base consisted of 11 journal articles that directly examined carbon taxes and emissions at national or cross-country levels.

The selected studies covered countries and regions including Indonesia, China, South Africa, Chile, Egypt, Morocco, and Europe, along with international comparisons. Because the studies used different models, datasets, policy assumptions, and emissions indicators, Azisah synthesized the findings thematically rather than combining them into a single statistical estimate.

Five Factors Shape Carbon Tax Effectiveness

The review identifies five recurring factors that determine whether carbon taxes deliver meaningful emissions reductions.

1. How tax revenue is used

Revenue recycling is one of the most important factors. Carbon tax revenues can be directed toward clean-energy investment, household compensation, reductions in other taxes, or broader fiscal stabilization.

Studies reviewed by Azisah indicate that the choice of revenue use can affect both environmental outcomes and economic costs. In China, for example, recycling carbon tax revenues through capital tax reductions or clean-energy support improved cost-effectiveness and environmental performance compared with carbon taxation alone.

2. Policy design

The tax rate is only one part of the equation. Sectoral coverage, exemptions, the pace of future tax increases, and coordination with other climate policies can determine whether the price signal is strong enough to influence economic behavior.

3. International trade and carbon leakage

A country may reduce emissions produced within its borders while emissions linked to imported goods remain unchanged or increase elsewhere. This can happen when carbon-intensive production shifts through international supply chains.

The review highlights evidence showing that national carbon taxes can reduce territorial emissions without necessarily producing equivalent reductions in consumption-based emissions.

4. Distributional effects

Carbon taxes can affect households, industries, regions, and economic groups differently. The review therefore emphasizes the importance of considering affordability and compensation alongside environmental targets.

5. The type of evidence available

A significant limitation in the existing literature is that many studies rely on economic simulations to estimate what carbon taxes could achieve. Evidence showing what happens after a carbon tax has actually been implemented remains comparatively limited.

Indonesia and the Developing-Country Perspective

Indonesia is among the countries represented in the reviewed literature. A study by Ramadhani and Koo found that a low domestic carbon tax could partly mitigate trade and economic effects associated with border carbon adjustments.

For developing economies, Azisah's review highlights several additional considerations, including fiscal capacity, energy affordability, industrial competitiveness, and the ability to protect vulnerable households.

The review suggests that gradual implementation, transparent revenue recycling, and investment in renewable energy, public transportation, energy efficiency, and green industrial development could help connect carbon taxation with broader low-carbon development.

What the Findings Mean for Policymakers

Azisah's analysis presents a cautious but positive assessment: carbon taxes can be effective in reducing emissions, but their effectiveness is conditional rather than automatic.

In an ethical paraphrase of the author's conclusion, the evidence indicates that carbon taxes work best when they are designed as part of a wider policy package that considers revenue use, vulnerable households, trade-exposed industries, sectoral coverage, and complementary climate measures.

The review also calls for more real-world research. Future studies could place greater emphasis on long-term, post-implementation evidence rather than relying predominantly on simulations. Such evidence would provide policymakers with a clearer picture of how carbon taxes perform under actual administrative, economic, and social conditions.

Author Profile

Andi Nurul Azisah is affiliated with the Department of Accounting, Faculty of Economics and Business, State University of Makassar (Universitas Negeri Makassar), Makassar, Indonesia. Her work in this article focuses on carbon taxation, fiscal policy, carbon emissions, and the economic and policy dimensions of climate mitigation. The uploaded article does not state her academic degree, so no degree is added here.

Research Source

Article Title: The Effectiveness of Carbon Taxes in Reducing Carbon Emissions: A Systematic Literature Review
Author: Andi Nurul Azisah
Journal: International Journal of Finance and Business Management (IJFBM)
Volume: 4, No. 3
Publication Year: 2026
Pages: 239–256
DOI: https://doi.org/10.59890/ijfbm.v4i3.2
Official Journal: International Journal of Finance and Business Management