GRProposal Serra Meira Santos

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The Impacts of Environmental Regulation 
 
Alexandre Serra1, João Meira2, Bruno Santos3 
 
1 Almada, Portugal, alexandreserra.reis@gmail.com 
2 Portalegre, Portugal, joaopcm@sapo.pt 
3Barreiro, Portugal, bfiss@iscte-iul.pt 
 
KEYWORDS: Regulation; Carbon Dioxide; Sweden; Brazil; Sustainability. 
 
ABSTRACT 
CO2 emissions has been, and it still is, one of the major environmental problems in our everyday 
life, since it is, between all other greenhouse gases, one of the biggest responsible for climate 
change and global warming, mainly because it is the one that has a major presence in the 
atmosphere (Figure 1). The major problem, and that is concerning every decision maker around 
the globe, is that CO2 emissions kept rising throughout the years all over the world (Figure 2), 
which makes it the biggest concern of the 21st century when it comes to global warming. 
In this essay, we study the impacts that regulation, specifically carbon tax, has on the economic 
and environmental development of the countries. Our main objectives are to analyse the different 
impacts that regulation has between developed and developing countries, since they tend to adapt 
to it in different ways, and if the responsibility of reducing CO2 emissions should be shared 
between all countries in all development stages, instead of them being transferred to countries that 
don’t have this type of legislation. To try and answer to all different questions surrounding this 
subject, we start by giving you an overall view of the problem, and the economic intuition behind 
the application of Co2 taxes, and then we move towards comparing two different perspectives: (1) 
Sweden, a country that combines decrease in Co2 emissions and economic growth, going against 
the traditional economic theory, and (2) Brazil, an emergent country, whose production is highly 
concentrated in the secondary sector, which sets a barrier to their efforts in reducing emissions. 
In the case of Sweden, we concluded that the best way of achieving an efficient level of both 
economic and environmental sustainability, is by giving back the tax revenue to the economy, in a 
sense to try and develop it. This gives us freedom to conclude that in societies with well-developed 
social systems, carbon taxes don’t always have to be associated with GDP reduction, since 
individuals are able to support the tax in order to beneficiate themselves through public goods. 
In the case of Brazil, we concluded that the application of taxes it’s effective in the reduction of 
CO2 emissions, having a larger proportion then the decrease of the economic growth. However, 
the decrease in the emissions was associated with a negative impact on GDP, so the implementation 
of the taxes has to be such that guarantees the economic development of the country who 
implements it. 
 
 
 
 
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1 INTRODUCTION 
 
1.1 Historic Context 
The environmental regulation is a subject that only gained relevance in the post-World War II, 
through the first Earth Conference and after the large industrial CO2 emissions that caused serious 
breathing problems in New York, Beijing, Tokyo and other. 
As the needs to control CO2 emissions increased, environmental regulation earned more 
importance throughout history: 
1st Period (between late nineteenth century and World War II) – Direct State intervention, through 
judicial power. 
2nd Period (50`s) – first implementation of pollutants emissions limits, and determination of the 
best technology for compliance with emission standards. 
3rd Period (currently) – adoption of economic instruments, and the defence of institutional 
cooperation, beginning with cooperation between economic operators, fighting environmental 
problems. One of the measures implemented was, for example, the European Directive “Integrated 
Pollution Prevention and Control”, in the year 2000. 
Today the environmental regulation is a very important topic to public governance because of 
problems such as climate change and fast decrease in natural resources. 
 
 1.2 Environmental regulation instruments 
The environmental regulation instruments can be divided into command and control instruments 
(direct regulation), economic and market instruments and information tools. 
The command and control instruments are norms, rules, laws and directives that impose an 
obligation to reduce the quantity of pollutants issued through measures such as: technological 
control, licenses and quotas to emissions, the requirement for application of filters in the collectors 
of the factories, quotas for the extraction of natural resources, etc. These instruments can produce 
controversial economic effects on the core business of companies, such as: limiting innovation and 
constraining the flexibility of choosing the most efficient means of production. 
The economic and market instruments are measures to internalize negative externalities (costs), 
generating economic and environmental efficiency, through the reallocation of resources in a free 
market. Some examples are taxes in pollutants and subsidies in the production of goods and 
services with reduced release of pollutants. 
Information tools are measures that raise awareness and inform the population. Some examples 
are: implementation of “Environmental Education” as a subject on the educational system, 
development of environmental stamps, certification of goods and services with a low 
environmental impact, being “environmental friendly”. 
 
1.3 The Impacts of Environmental Regulation 
In our work, we will analyse the economic foundation that supports the application of the CO2 tax, 
an economic and market instrument, firstly reviewing the definition of CO2 tax and the main 
arguments against its application. Based on the theoretical analysis, we will specifically analyse 
the country of Sweden and Brazil, to understand how the CO2 taxes can be efficient, but with 
different effects considering the level of development of the country. Having a literature review 
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throughout every topic of this paper, we study Sweden’s ability to keep both economic and 
environmental development, and why it’s difficult for developing countries to achieve this level. 
2 CARBON TAX - INTRODUCTION 
2.1 CO2 emissions 
Carbon dioxide is one of the most dangerous greenhouse gases emitted by humans and, being one 
of the primary causes of global warning, has serious consequences for humans and the 
environment. The carbon emissions raise global temperature by keeping the solar energy in the 
atmosphere. 
In 2015, 82% of greenhouse gas emissions were from carbon dioxide, reflecting the importance of 
this issue, has it keeps increasing along the years. In terms of sectors, electricity and heat 
production are the largest source of this emissions, related with the burning of coal, natural gas and 
oil for electricity. The transportation industry is also associated with these types of emissions, 
because of the use of gasoline and diesel to transport people. 
There are several ways of reducing Carbon dioxide emissions, such as the use of carbon-free or 
reduced-carbon sources of energy, or economic and market instruments, involving regulations that 
control the level of emissions in a certain area. In the example further studied in this paper, forestry 
can also be used, not being a direct way of reducing emissions, but an alternative way of “cleaning” 
the air. We can see it in this term: carbon regulation is similar to a policy that forces people to stop 
throwing waste to the rivers (directly affecting those who pollute), and the development of forestry 
is a policy that intensifies the cleaning on those rivers, not imposing a direct restriction topolluters. 
Because trees store carbon, one of the ways to combat climate change is to plant more trees, thus 
reducing the amount of carbon existing in the atmosphere. 
2.2 CO2 tax 
Two of the most important types of measures are: cap-and-trade system (EU ETS), an indirect way 
of emissions control, and direct regulation through carbon taxes. In the Cap-and-trade system, it is 
established a cap for carbon dioxide emissions, so companies and other agents receive a permit, to 
emit carbon dioxide up to a certain limit. Through carbon taxes, governments are able to have a 
more direct control over industries. 
Unpriced CO2 emissions are an example of the social costs of a product not being reflected on the 
market price, because neither producers or consumers pay for the damages caused by climate 
change (World Resources Institute, 2016). Economic growth models in the past century depended 
highly on mass production, thus achieving the highest levels of productivity in the 20st century. 
Nowadays, the concept of global warming as become transparent, and countries have debated 
around the future of our resources. If we define Economy as the study of how limited resources 
satisfy unlimited needs, the preservation of natural resources becomes relevant, so policy makers 
have tried to include the environment in all of economic definitions 
World Resources Institute (2008) defines CO2 tax as: “A fee imposed on fossil fuels, and other 
primary products, based on the amount of carbon dioxide that is released when coal is burned. The 
tax creates a cost for emitting GHGs into the atmosphere and in doing so provides a financial 
incentive for reducing GHG emissions”. The universal dimension of this tax is difficult to apply, 
because each sector has its own characteristics, and for it to be rightly used, it should be 
discriminated among sectors. The sectors with the highest percentage of CO2 emissions must pay 
higher taxes, to guarantee that the tax doesn’t harm those with a lower but positive emission level. 
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Therefore, the carbon tax, although it stands as a direct way of control, its an indirect tax, because 
it’s not applied directly on the income, but on the emissions, shifting this costs to the polluter, 
internalizing the externality and guaranteeing that the final price includes the external cost, and not 
just the private cost. Today, about 40 countries and more than 20 localities have implemented a 
carbon pricing scheme, following the theory of Arthur Pigou, who suggested a tax on negative 
externalities (National Geographic). 
This tax establishes a direct link between the GHG emissions and the tax paid on it, making a 
financial incentive for companies to lower their emissions, reducing their payments and finding 
new methods of production, more environmental friendly, that use alternative renewable energy 
resources, promoting a more ecological lifestyle, to them and to the consumers, who are 
encouraged to change their consumption patterns. 
There are several costs of this measure, such as the primary cost, being the direct cost of the carbon 
tax, related with the increase in the price of fossil fuels in direct proportion of the carbon content. 
The raise in production costs will have a chain impact, increasing the prices of goods and services 
that depended highly on these types of energy. The change in prices will have two types of 
economic effects: output effect and substitution effect. Output effect, with higher fossil fuel prices, 
reducing real wages, because the purchasing power decreases, and the profit on investment will 
decrease, making the total output of the economy decrease. The other effect is substitution effect, 
with a shift in the mix of goods and services consumed, from goods and services that involve high 
emissions of carbon dioxide to other goods and services with few CO2 emissions (Congressional 
Budget Office, 2013). Also, taxes can have a regressive impact on the consumers, because the 
increase in the price of energy intensive goods hurts the low-income population more than the rich, 
because they spend a larger proportion of their income on this type of goods (Yassid Dissou, 
Muhamaad Shahid Siddiqui). For the tax to be efficient, the revenue can be used to invert this 
impact, using a lump-sum payment to eliminate the regressive nature of the tax. 
Baranzini (2000) defined a total of four ways of using the revenues received by carbon tax. The 
first one being a tax reform, consisting in the decrease of other types of taxes, maintaining total 
revenue constant. The second one being the financing of environmental programs, subsiding the 
study of new alternatives methods of production and consumption. The third one, repairing the 
damage made by the emissions and the fourth one, using the funds in a social perspective, 
increasing social spending in areas such as wealth, education, etc. Although is not the main target 
to use environmental taxes in government spending, some of the projections of the countries budget 
shows an increase of the budget deficit and external debt (Robertson C. Williams, 2016). 
Therefore, the need for budget consolidation keeps increasing, and it can be done through 
environmental taxes, although is not politically correct. Since every country is interested in finding 
new sources of tax revenue, and since the emissions of greenhouse gases keeps increasing, 
combined with the use of products which waste is not correctly disposed, tax policy on 
consumption seems an important measure, providing an extra tax-revenue and an efficient way of 
reducing consumption. 
2.3 Critiques to CO2 taxes 
Carbon taxes are taxes on 85 percent of the energy we use, so they impose a restriction to most of 
economic activity, especially directed to producers in sectors such as coal mines, natural gas and 
oil. The cost of administrating the tax may be expensive, and one of the problems is that is difficult 
to create an optimal carbon tax, because the policy maker does not always have all the information 
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needed (Institute for Energy Research). The limited information may cause inefficiencies on the 
internalization of the externality and not reflect the real social costs and, the price of demand is 
inelastic, so the tax might have to be very high to reduce consumption of this types of goods. 
Another structural problem is that production may be shifted to countries with non-existing or 
lower carbon taxes. We can look at GDP in two dimensions, the first one being the decrease in 
output related with the restrictions imposed on the production of the companies, having to invest 
in alternative technologies to guarantee the minimum CO2 emissions, and the other related with 
the transfer of production to the countries that don’t have the tax, reducing the employment and 
the GDP of country with such policies. 
As seen, production will flow to countries that don´t have this type of policy. As the main objective 
is to reduce total emissions, it makes no sense to bet on policies that only change the geographic 
location of emissions. All carbon users should pay the same rate, because the environmental 
externality of using carbon is independent of where it is used. These policies are not efficient, and 
the perfect scenario avoids the transfer of CO2 production. As the main objective is to reduce total 
pollution, becomes fundamental to interconnect the different dimensions of the tax. If there is no 
international law to force countries to participate in a climate agreement, each country may have 
an incentive to be a free rider, and stay outside the agreement instead of participating in it. If the 
country stays outside the agreement, it can enjoy the same benefits of reducedemissions as if it 
participates in the agreement, while it does not support any of the costs of reducing emissions. This 
free rider incentive remains even if the agreement is such that all countries are better off with the 
agreement than without: a country may be better off participating in an agreement than it would be 
without any agreement (Michael Hoel, 1996). 
The developed countries that want simultaneously to stay competitive and environmentally 
sustainable, as a rule, they tend to emphasise the harmonization between humans and the 
environment (Larysa Nekrasenko,2015), being Sweden the leading country in these practises. 
The developing countries may not afford the increase in the energy costs, whilst maintaining their 
competitive factor, especially on countries who highly depend on the manufacturing sector. Most 
of annual emissions are produced by these developing countries, as they rely heavily on fossil 
fuels, as it is the cheapest energy resource available, and being one of the key components of their 
economic growth in recent years, which keeps them competitive in a pre-tax scenario, and enables 
their fast-economic growth rates and lower poverty rate. 
For example, in South Asia, the number of people living in extreme poverty decreased 30% as the 
amount of carbon dioxide increased by 204%. In Sub-Saharan Africa, the number of people living 
in poverty increased by 98% while carbon dioxide decreased by 17% (Tucker Davey, 2016). 
So the main questions to be answered are: does Co2 taxes have a negative impact on the economic 
growth of the country who implements it? Do the developing countries have capacity of competing 
with the developed countries, in a scenario of carbon taxation? 
 
 
 
 
 
 
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3 SWEDEN CARBON TAX – EMPIRICAL APPLICATION 
 
3.1. Sweden’s overview 
 
When it comes to reducing CO2 emissions and environmental taxes applications, Sweden has to 
be a highlighted country, when searching for the answer to our essay, due to their enormous effort 
in this area, since they charge one of the highest carbon tax in the world. But, knowing that tax 
payment is most of the times a sort of a “taboo” for the usual populations, how can Sweden apply 
such a high tax on CO2 emissions? The answer is that Sweden’s habitants are very tax friendly, 
since they also beneficiate a lot from them, in general, once Sweden as very generous social system. 
This happens because Sweden is a country that gives their population universal access to public 
services, such as health care, and if, by paying more taxes, they can improvement their 
environmental conditions, that help improve their health and the services associated with it, then 
Sweden’s population is willing to accept this tax increase with no problems. 
 
3.2. The Climate Act 
 
It has been observed since the late 60’s, and majorly in the last decade, since emissions have raised 
more rapidly all over the world, that Sweden has been able to reduce its CO2 emissions to levels 
that were, at least some years ago, unthinkable. They reached an all-time low of CO2 emissions in 
2015 (Figure 3), and promise to keep on lowering them in the near future, as their Environment 
Minister and Deputy Prime Minister Isabella Lovin pledged an ambitious goal to reach net-zero 
greenhouse gas emissions by 2045, when signing their Climate Act, which implied that the 
Government should present a climate report every year in its Budget Bill and that it should present 
a climate policy action plan every four years with the right directions to reach their climate goals. 
The way the Government is going to control these emissions is through its control in sectors like 
transportation, machinery, small industrial and energy plants, housing and agriculture, which, by 
the way, are not include in the European Union Emissions Trading System (EU ETS). So, CO2 tax 
is coordinated with the EU Emissions Trading System, since it serves as a complement of it, and 
once it gives an alternative to these cap-and-trade schemes by giving a “direct price” to carbon 
dioxide emissions, not allowing the more polluting industries to avoid the tax burden by trading 
licences with the less pollutant ones. 
As stated by World Bank, there are also more indirect ways that can accurately price carbon, such 
as the application of fuel taxes, the removal of fossil fuel subsidies, and regulations that may 
incorporate a “social cost of carbon”, depending the chosen instrument on national and economic 
circumstances of the countries. Greenhouse gas emissions can also be priced through payments for 
emission reductions and private entities or sovereigns can purchase emission reductions to 
compensate for their own emissions (so-called offsets) or to support mitigation activities through 
results-based finance. 
3.3. Implementation of the carbon tax 
In 1991, Sweden introduced a carbon tax, with the energy sector reform, and it came as a 
complement of the already existing energy tax, which was until then, and still is nowadays, a big 
fiscal tax source and an important policy instrument as it can be shown by empirical data, which 
shows us the growth in the importance of carbon taxes in the overall taxes applied by Sweden on 
fossil fuels (Table 1). The sectors that suffered a major taxation included natural gas, gasoline, 
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home heating oil, light and heavy fuel oil, liquefied petroleum gas (LPG), and coal, that is, by far, 
the largest source of energy-related CO2 emissions globally, accounting for more than 70 percent 
of the total (Figure 4), which reflects both the widespread use of coal to generate electrical power, 
as well as the exceptionally high CO2 intensity of coal-fired power (Vivien Foster and Daron 
Bedrosyan, 2014). All of these tax appliances have to always take in consideration the limitations 
that exist in the universal application of taxes, since there is always some sectors that get more 
affected than others. Both carbon tax and energy tax focus on “attacking” the use of fossil fuels (in 
the combustion process) in the industry and energy sectors, and both have the objective of making 
firms, that use these types of combustion processes, reduce the use of materials that are rich in 
CO2, leading them to substitute those materials by biomass, or other renewable resources used in 
heating and other energy production sectors, and so, in this way, reduce CO2 emissions. 
 Since the beginning of carbon tax application, the main strategy that has been applied by Sweden 
is to slowly increase taxes on CO2 emissions in the industry sector, because this is the most difficult 
one for these taxes to work on, in the short-term, with its main objective being the avoidance of 
carbon leakage in sectors subject to international competition because. The Swedish CO2 tax has 
two tax levels for heating fuels, with a lower level for industry and agriculture and a higher level 
for households and services, being its main objective the correction of the gap that exists between 
both tax levels, by gradually increasing the tax in both. The Swedish Government is considering 
continuing the phasing out of the lower tax rate in the near future (Figure 5 & 6). This can be due 
to interests that exist in this sector that make industries take a role of “not carrying” about the 
environmental issues and that are willing to pay the tax with no problem, at least until they reach 
their marginal costs, or as long as they can trade emission licences with the less pollutant industries, 
that allow them to stay within their pre-allocated carbon budget. To solve this, parliament decided 
to gradually limit CO2 tax exemptions for energy intensive industries and others between 2011 
and 2015outside the EU-ETS. With tax regulations the Swedish government can assure that 
companies try to reduce the use of materials that emit to much CO2 to the atmosphere and increase 
the use of less armful materials, in order for them not to be obligated to pay too much tax, which 
can be seen as an incentive for companies to try and develop new technological methods of 
production that are more environmental friendly, as well as more efficient, since it is believed that, 
as said by Swedish Minister of Finance Magdalena Andersson, “a price on carbon will steer 
investment and everyone’s choices away from fossil fuels to more environmental friendly 
alternatives” (2016). As a proof of this effectiveness of the tax regulation, a study by the Swedish 
Ministry of the Environment and Natural Resources (1995) revealed that the carbon tax made a big 
influence onto energy consumption patterns, which led some plants owners to shift their energy 
sources from fuel oil to biofuels. 
 Now, as we know from our empirical study, just applying taxes is not enough to reduce the 
environmental problem that is the quantity of CO2 present in the atmosphere. Another solution to 
this problem is the implementation of measures that can result as an effective mechanism to 
develop forestry, because it is known that CO2 emissions are absorbed mainly by trees and other 
plants that coexist in the nature, so by increasing the quality of the forests, and their natural 
resources, we can increase the quantity of CO2 that is absorbed by nature, and so, letting less 
quantity to hang over the environment. This field is once again one of the special features of 
Sweden, since they are dominated by forests, being them vitally important for the national 
economy, and since most Swedes closely relate to forests and forestry pursuits. Swedish forests 
have high rates of productivity and low rates of natural disturbances, thus allowing for large 
transfers of biomass from forests through the avoidance of emissions from emission-intensive 
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products such as steel and concrete, and from fossil fuel and products (Carl-Anders Helander, 
2015). For this reason, it is clear that Sweden is a very effective country on reducing CO2 emissions 
through forestry absorptions, being this amount more than half of the countries’ CO2 emissions 
(Figure 7). 
3.4. Reducing emissions and increasing GDP 
 
In an overall view around the world, some countries find it difficult to apply taxes on carbon 
dioxide emissions due to the reaction and acceptance of their population to these measures. But the 
one thing countries see as almost impossible is the application of these tax policies while having 
economic growth at the same time, not just by following the general thought but also because some 
countries tried and failed to do it. And that is another reason why Sweden is such a great example 
of the application of tax policies, once they were, and are, able to brake this usual way of thinking, 
since they reduced CO2 emissions throughout the years while, at the same time, they were able to 
do the remarkable thing of growing their GDP alongside with it (Figure 8). The main reason why 
combining these two aspects is so difficult is that, by applying taxes to companies that attain a 
certain level of CO2 emissions, this will lead them to have higher production costs, thus final 
consumption products and services will tend to have higher prices/costs to the consumers, which 
leads to the general empirical idea that the main tax burden falls on ordinary citizens, and so the 
demand for them will decrease, which can tend do lead to a lower level of aggregate consumption 
and thus less production levels, which, combined with low demand forms a kind of a cycle between 
this dynamics that lead to a lower level of GDP. Another way to look at this cycle is that some 
industries may reduce their production levels right when the tax is applied due to their internal 
difficulties of reducing carbon dioxide emissions while continuing their usual production processes 
or do to their financial difficulties in acquiring pollution licences to other, less polluting, 
companies. And being able to counteract this fact is what makes Sweden such a remarkable 
country. In the Swedish case, the biggest contribution to the success of tax application alongside 
with economic growth is the fact that tax revenues are used in favour of the society, and the 
improvement of their everyday lives, since these taxes are used to increase the public investment, 
being known that Sweden has the most advanced health care and social welfare systems, and that 
is what makes the population being so in favour of paying these taxes, it’s because they will 
eventually revert to their benefit. Another advantage of giving back those taxes to the society is 
that it can bring benefits to the country as a whole once it can reduce fiscal evasion, because the 
part of the population that as a lower level of earnings, being them the ones who do this fiscal 
evasion more often, won’t have such an incentive to “runaway” from taxes, since they will 
eventually be beneficiating from it, through health care and other social services. So Swedish 
population will continue to “happily” pay taxes and consuming the same way, and industries will 
continue to produce and offer the same or even more quantities in the market, maybe with a better 
price since they will develop better technological production methods, that allows them to produce 
in a more efficient way, a way that doesn’t harm the environment, because they don’t want to pay 
taxes, so all their innovations in the production processes will be done in the direction of reducing 
their CO2 emissions, so that they don’t pay to much tax, and continue to be able to maintain their 
production processes. 
 
 
 
 
 
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4 BRAZILIAN CARBON TAX – EMPIRICAL APPLICATION 
 
4.1. Application of carbon taxes in developing countries 
 
The problem of the application of carbon taxes in developing countries as obtained, throughout the 
years, a bigger economic relevance ever since climate changes have been assumed as one of the 
main priorities to economists and seen as a concern to policy makers. This problem is a main 
consequence of the exclusion of the major part of the world’s developing countries from 
international negotiations, such as Kyoto Protocol (1997), and that were intended to reduce CO2 
emissions to the atmosphere. Many studies have criticized these decisions, like for example 
Edmonds et al in 1997, who thought that if developing countries would had been included in the 
making of the decisions that resulted from Kyoto Protocol, the social and economic costs would 
have been diminished by 50%, which is a very significant value. From this conclusion many other 
authors started to study in more detail the theories and arguments that can prove this evidence of 
inclusion of the developing countries in these types of negotiations and also in the decisions about 
establishing goals and sanctions to countries that don’t work in the way of try and reducing CO2 
emissions. So, with focus on climate changes, environmentalists and economists started to call out 
the developing countries to their responsibilities related with these subjects, this because their 
previsions are that, by the year of 2030, over half the CO2 emissions will come from developing 
countries, which implies that they should have a major role between the decisions that are taken to 
counteract these levels of pollution (Boseti & Buchner, 2009). And this is where Brazil gets a 
leading role in our analyses since, being a developing country, it is shown by empirical data that 
they got a major role when it comes to thesetypes of decisions. For example, in 2009 and 2010 
they participated in Copenhagen and Cancun Conferences, respectively, where they undertook, 
voluntarily, the decision to reduce 36.1% (2009) and 38.9% (2010) of their projected CO2 
emissions until 2020. Other indicators proving that Brazil, have taken conscience of climate 
changes its their approval of the Nacional Policy on Climate Changes (2009) and the signing of 
the Paris Agreement (2015), which was also sign by a major part of the developing countries too. 
When it comes to applying direct carbon taxes in developing countries, it is necessary to take in 
consideration that this “aggressive” policies may create barriers to economic growth, in some of 
them, and increase social inequalities even more. Some academics defend that the reductions of 
CO2, and consequent tax payments, should be differentiated as a function of the pace that countries 
grow, because some countries like Brazil, India or even China, that, within the developing 
countries, show growth rates of their GDP at an average of 6%, tend to react more firmly to the 
socioeconomic impacts that are caused by carbon taxes, not being so harmed when comparing to 
countries that are in a short level of development and can’t generate an economic growth big 
enough to support the harm caused by these taxes. 
So, now we see that developing countries face a sort of a “double trouble”, that is to balance 
economic growth with CO2 emissions reduction. This is a problem that can create a lot of problems 
to those countries, but it may also lead to their greater development because they will try, at least 
some of them, to overcome this problem, which will imply that they try to develop more efficient 
methods of production that can, at the same time, increase their GDP and decrease their carbon 
dioxide emissions. Off course this is a very difficult process to do because they don’t have, like 
developed countries, a large amount of renewable resources and great technological methods of 
production, but just by trying to figure out a way on how to turn around these difficulties will lead 
them to develop more rapidly as a country. 
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4.2. Prediction of the Carbon Tax impact 
 
So, in order to analyse the impacts of carbon taxes applied in developing countries we decided to 
use Brazil an example of study, because this is a country that has affirmed itself, in the past decade, 
as a great emerging economy, due to their rapid pace presented in their economic growth, despite 
still presenting low patterns when it comes to human development and economic conditions that 
still characterizes it as a developing country. 
Brazil’s National Association of Economic Investigation as developed numerous microeconomic 
studies that allowed them to make a provisional analysis about the impacts of implementing a 
specific tax to carbon dioxide of US20 per ton of CO2. This prevision is made to the period between 
2015 and 2050, with the assumption that price of the ton of carbon will increase at the annual tax 
rate of 4%. Through the test it can be concluded that in 2015 the impact of the application of this 
carbon tax is negative, with a variation of the GDP of -0.35% when comparing to the reference 
value with no tax application, until 2030 the variation registered in the GDP is about -1%, and from 
there until 2050 the impacts get even more negative, reaching a value of -6.08% in that last year 
of the sample (Table 2). 
In order to evaluate the efficiency in the reduction of Brazilian’s CO2 emissions, it was made 
another test that has the same intuition as the previous one, always comparing the values with the 
application of the tax to the reference values. From Table 3 we can see that in 2015 CO2 emissions 
were reduced, after the application of the tax, by 8.08%. Between 2015 and 2050 it can be seen a 
tendency showing an acceleration in the rhythm of reduction of CO2 emissions, which shows the 
efficiency of the tax in reducing CO2 emissions. 
From these two hypotheses studied we can see that the application of the carbon tax in Brazil serves 
as a more effective way of reducing CO2 emissions than in not harming economic growth, despite 
affecting, as expected, much more the CO2 emissions than the economic growth, which can be 
seen as “less bad” to the country, but still not the more efficient way of reducing carbon dioxide 
emissions, since it presents a progressive increase on the reduction of GDP. 
4.3. Socio-economic implications 
 
Based on the previous studies Institute “Escolhas” developed real case studies about the application 
of carbon taxes in Brazil. They made a study analysing the impacts that two different taxes, that 
where in already being applied in Brazil, where having in the economy. One of the taxes was US 
10 per ton of CO2, applied to emitters with a lower impact, and the other one of US 50 per ton of 
CO2, applied to emitters with a higher impact. The empirical evidence of Brazilian economy, in 
2011, showed that the application of the US 10 tax generated a public recipe of 10.4 billion of reais 
and that the application of the US50 tax generated a recipe of 51.3 billion of reais (Table 4). But 
now we know that, to see if the tax revenues generated a positive effect on Brazilian economy, it 
is necessary to consider the impacts that the carbon tax produced on GDP, salaries and 
employment. From Table 5 we can see that both taxes produced a negative socioeconomic effect 
not just on GDP but also on salaries and employment. This impact became more negative when 
the carbon tax increased from US 10 to US 50. 
Finally, we need to make an evaluation on how the reduction of CO2 emissions has been an 
effective measure. According to Table 6, we see that the application of a US 10 tax per ton of CO2 
produced a reduction of 1.2 millions of tons of CO2, being this value inferior to the one that is 
obtained with the US50 tax per ton of CO2, which shows that the bigger the tax applied on CO2 
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the bigger are the reductions of its emissions, leading to the conclusion that the application of the 
tax is effective, in opposing to its efficient level, which is low, because we can see that the negative 
socioeconomic impacts in the country increase as the value of the tax increase. This evidence 
shows then that the carbon tax is harmful to the economic development of the country. 
4.4. Final thoughts on Brazil 
 
So, with this studies in Brazil, which can be generalised to other similar developing countries, we 
are able to see that the application of a carbon tax in these countries can generate economic 
inefficiency, due to its negative socioeconomic impacts, although it can guarantee that CO2 
emissions are reduced effectively, despite not being made efficiently. 
By comparing empirical data with academic researches, and the techniques that are used for these 
studies, we concluded that the idea of giving equal responsibilities and efforts to try and reduce 
CO2 emissions, thus fighting climate changes, if equal between developed and developing 
countries will lead to series of negative consequences on developing countries, compromising this 
way their development on both social and economic fields, which will lead to an increase in the 
gap between developed and developing countries, and thus, by knowing this, developing countries 
will not have an incentive to become more environmental friendly, since they don’t want to be 
harmed even more. 
 
5 CONCLUSION 
The increase in Co2 emissions has brought an additional concern to policy makers as it becomes 
necessary to ensure the existence of natural resources in the future while simultaneously securing 
current economic growth. 
Being one of the mostdangerous gases on the planet, and representing 82% of all greenhouse gas 
emissions, several measures have been proposed to combat this impact: cap-and-trade systems that 
set a maximum cap on emissions, and CO2 emissions tax, directly restricting the activity of the 
economic agents, and the investment on the growth of trees, because these retain the amount of 
CO2 existing in the atmosphere. 
To achieve this level of emissions, becomes necessary to connect the interests of all countries of 
the world, in order to reduce the total elimination of these emissions, and not only transfer 
geographically these emissions. 
According to the economic theory, the introduction of taxation in CO2 emissions results in a fall 
in GDP, due to the restrictions imposed on the production and consumption of economic agents. 
These types of taxes also have a regressive dimension, as they affect individuals with lower 
incomes. State intervention is needed to reduce inequalities and ensure that economic growth is 
not affected by emissions. Sweden is the developed country that best combines these dimensions, 
because despite having one of the highest taxes on CO2, its economic growth is remarkable, 
proving that it is possible to have a high economic growth even when emissions are taxed, 
maintaining social equality. 
Developing countries, has developed countries, should conciliate economic growth and CO2 taxes. 
Many of them, when applying the CO2 tax, have had a decline in economic growth and poverty 
rate, decreasing their competitive behaviour in nowadays economy. Brazil is an example of why 
the implementation of the tax in developing countries may generate economic inefficiency, because 
although reduces the CO2 emissions, comes with a price of reducing economic growth. This will 
12 
 
decrease their competitiveness and increase the already existing gap between developed and 
developing countries. 
In other words, the CO2 tax to be efficient requires that the total emissions be reduced, however, 
it must be analysed and applied to ensure that the countries who implement it do not suffer an 
economic penalty such that in addition to losing competitiveness, they increase their poverty rates. 
As said by (Boseti & Buchner, 2009), in the present and in the future, developing countries have a 
great contribution to global emissions, so it’s important to correctly ensure their participation in 
reducing emissions. 
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14 
 
APPENDIXES 
Fig.1 
 
Global Greenhouse Gas Emissions by Gas. Source: World Bank 
Fig. 2 
 
CO2 emissions (kt). Source: World Bank 
Table 1 
 
Total taxes charged in Sweden. Source: OECD 
 
 
 
 
15 
 
Fig. 3 
 
Sweden’s CO2 emissions (tons per capita). Source: Knoema 
Fig. 4 
 
Energy-related CO2 emissions by fuel. Source: World Bank 
Fig. 5 
 
Development of the Swedish carbon tax at general and industrial level. Source: Swedish 
Environmental Protection Agency 
 
 
16 
 
Fig. 6 
 
Development of the Swedish carbon tax at general and industrial level. Source: Swedish 
Environmental Protection Agency 
Fig. 7 
 
 
Carbon uptake by forest. Source: Vox Ukraine 
Fig. 8 
 
Real GDP and CO2 emissions evolution in Sweden. Source: Swedish Environmental Protection 
Agency 
17 
 
 
Table 2 
 
Brazilian GDP in billion dollars before and after tax and variation rate. Source: Universidade 
Federal de Minas Gerais – Centro de Desenvolvimento e Planejamento Regional 
 
Table 3 
 
Brazilian emissions of Carbon Dioxin before and after tax and variation rate. Source: 
Universidade Federal de Minas Gerais – Centro de Desenvolvimento e PlanejamentoRegional 
 
Table 4 
 
 
 
 
 
 
 
Tax revenues (R$ bi). Source: Associação Nacional dos Centros de Pós-graduação em Economia 
 
18 
 
Table 5 
Reduction in emissions. Source: Associação Nacional dos Centros de Pós-graduação em 
Economia 
 
Table 6 
 
 
 
 
 
 
Taxation impacts GDP, Wages and Jobs (R$ bi). Source: Associação Nacional dos Centros de 
Pós-graduação em Economia