Introduction to Carbon Taxes and Environmental Levies
In most cases, the development of e-commerce is reflected in percentage growth, the total value of goods sold and purchased, and the impact of low-value goods from primarily China on domestic sellers. However, the effects of expanding global trade have a second side as well, which is reflected in the levels of pollution caused by production and supply chains in international e-commerce.Â
Climate change and the adverse effects of global trade prompted policy experiments to mitigate them, leading to the development of carbon taxes and environmental levies. From local attempts to price pollution, these policies transformed into a diverse group of taxes and charges designed to change behaviour, raise revenue for green transitions, and correct market failures that ignore environmental costs.
Understanding Carbon Taxes and Environmental Levies
Before going into greater detail on how these taxes are implemented globally, how they work in practice, what impact they have on businesses, and the compliance and reporting challenges they pose, it is necessary to understand their basics.
The Basic Concept of Carbon Taxes
In the process of shifting to a low-carbon economy, governments around the globe are placing carbon taxes at the center of their climate strategies. A carbon tax is one of the earliest and simplest mechanisms for putting a price on the environmental cost of emitting carbon. The way it works is that it monetizes the carbon content of fuels or quantified greenhouse gas emissions. In other words, governments set a price per tonne of COâ‚‚ or COâ‚‚-equivalent.
Sweden is one of the best examples of how carbon taxes are implemented and what benefits they bring. Introduced in 1991 at SEK 250 (about EUR 22) per tonne of fossil COâ‚‚, it was gradually increased over time to allow households and businesses to adjust without significant economic disruption.Â
In addition to making policy politically acceptable, this approach helped industries adapt to higher carbon costs, which in 2025 are SEK 1,510 (around EUR 134) per tonne for fully fossil fuels such as natural gas and coal, while fuels with lower fossil content are taxed proportionally. Today, the carbon tax works alongside the EU Emissions Trading System (EU ETS), introduced in 2005, setting explicit carbon pricing for more than 95% of Sweden’s fossil COâ‚‚ emissions, creating one of the most comprehensive carbon-pricing regimes in the world.Â
Notably, the tax generates significant revenue for the budget. Although the funds are not dedicated exclusively to climate projects or environmental programmes, the government may allocate portions of the budget to address distributional impacts or to support climate-related investments.
Environmental Levies as Operational Costs
Environmental levies represent a broader category of corrective charges tied to specific environmental harms beyond greenhouse gases. Some of the most well-known examples of environmental levies include those imposed on single-use plastics or non-recycled packaging, landfill and incineration fees, product stewardship charges for batteries and electronic waste, and targeted levies on pollutants that affect air or water quality.
Compared to carbon taxes, environmental levies are typically narrower in scope and aim to change behaviour by making environmentally harmful products or actions more expensive. One of the prime examples of such environmental policies is the EU's levy on non-recycled plastic packaging waste.
Why Governments Are Implementing These TaxesÂ
There are several complementary reasons why governments are implementing carbon taxes and environmental levy policies. Firstly, these policies force businesses and consumers to take into account the real social and ecological costs of their actions, rather than leaving those costs for society to bear. By pricing pollution and waste, these measures discourage the overuse of carbon-intensive energy sources and disposable materials.Â
Additionally, these taxes represent an important source of government revenue that can support the broader transition to a low-carbon economy. Examples of how tax revenues are being invested include building renewable energy systems, modernizing public transport, improving energy efficiency, and supporting long-term innovations that reduce emissions. Moreover, generated revenue can be used to compensate households or vulnerable groups who may face higher energy prices as a result of the tax.
Furthermore, by making high-emission activities or products more expensive, these taxes encourage companies to invest in cleaner technologies and more efficient processes. Simultaneously, consumers are motivated to buy products that are recyclable, energy-efficient, or have a lower environmental impact. Therefore, the financial pressure caused by these taxes creates a continuous incentive to innovate and adopt sustainable practices.
How These Taxes Fit Into Modern Indirect Tax
In the first line, both carbon taxes and environmental levies are types of indirect taxes. However, and what is equally important, when being compared to the VAT or GST, as the most recognizable indirect taxes, carbon taxes and environmental levies are somewhat asymmetrical.Â
While VAT or excise duties, such as tobacco excises, have long been used to generate revenue neutrally and predictably, and to some extent to address behavioural effects, carbon and environmental taxes, sometimes referred to as green taxes, are fundamentally corrective instruments. Instead of taxing consumption, the green taxes target specific activities that contribute to environmental harm.Â
Notably, the link between these taxes becomes even tighter in light of recent policies that propose applying reduced or zero VAT or GST rates to goods and services with a lower environmental footprint or to environmentally beneficial products, such as solar panels, energy-efficient appliances, and public transportation services. In addition, many governments around the world have decided to remove VAT or GST exemptions or subsidies for industries identified as more polluting, and to incentivize greener sectors and solutions.Â
The result of implementing green taxes is a patchwork of new rules and tools for handling emissions data, lifecycle assessments, and producer responsibility calculations, all of which Customs and Tax Authorities and businesses must adapt to.
Conclusion
While the concept of green taxes is not new, their increasingly important role in shaping modern indirect tax systems is apparent. With the EU Carbon Border Adjustment Mechanism (CBAM) coming into effect in 2026 and other national and international rules on carbon pricing, it is safe to say that carbon taxes and environmental levies are a new frontier for indirect taxation. What businesses need to understand is that these environmental fiscal instruments will increasingly influence pricing, supply chains, and compliance priorities.
Source: European Parliament, European Commission, OECD, Government Office of Sweden, UNDP, World Bank Group, VATabout
Carbon taxes are charges imposed on the carbon content of fuels or on quantified greenhouse gas emissions. They assign a monetary cost to COâ‚‚ emissions, encouraging businesses and consumers to reduce them.
Environmental levies are broader corrective charges applied to specific environmental harms beyond carbon emissions, such as single-use plastics, non-recycled packaging, landfill waste, or pollution affecting air and water quality.
Carbon taxes target greenhouse gas emissions, while environmental levies address specific pollutants or behaviors, such as plastic use or waste generation. While carbon taxes are often economy-wide, environmental levies tend to be narrower and more targeted.
Not always. Some countries place revenues into the general budget rather than earmarking them exclusively for environmental projects. However, funds may still be allocated to climate-related and ecological measures.
Many governments are removing exemptions or subsidies from polluting sectors and shifting tax incentives toward greener products and technologies. This alignment integrates environmental priorities into standard tax systems.
With systems like the EU Carbon Border Adjustment Mechanism (CBAM) entering into force and more countries adopting carbon pricing, environmental taxes are reshaping how governments regulate trade, production, and consumption in the low-carbon era.
