Carbon Taxes Create an Outsized Burden for Developing Countries

Last week’s United Nations COP29 climate summit underscores that achieving equity in carbon pricing and climate policy between the Global South and Global North demands a nuanced approach that embraces differentiated policies, robust international support, and a commitment to fair global governance.

Negotiators on Friday struck a $300 billion deal for wealthier countries to help developing nations cut pollution. However, developing countries had asked for more than $1 trillion a year and said $300 billion a year was far short of what they need. Negotiators also struck a carbon credits agreement that will pave the way for more trading activity.

Carbon taxation, or more generally, carbon pricing, aims to reduce greenhouse gas by placing a financial cost on carbon dioxide emissions. This has become a pivotal tool in the fight against climate change, employed by some governments to encourage industries to adopt cleaner technologies and influence consumer behavior.

But it raises some complex issues for the Global South—economically developing countries primarily in Latin America, Africa, and parts of Asia that face socioeconomic challenges often in stark contrast to the wealthier nations of the Global North. Carbon taxes could raise the costs of energy, food, and transportation, disproportionately affecting the poor in developing countries.

Developing nations face unique challenges—economic vulnerability, energy poverty, and developmental needs—all of which can complicate decisions about the adoption of carbon taxes. While these nations have contributed less to global emissions historically than developed countries, and many still have a small carbon footprint, they are disproportionately affected by the adverse effects of climate change.

CO₂ emissions have a global impact wherever they are produced. So while developing countries want to play their part in mitigation, implementing carbon taxes could hinder economic growth by driving up costs. There also is concern that such taxes could be regressive and worsen inequality.

How to level the playing field to ensure carbon taxation is fair and effective throughout the world remains a highly contested debate.

The principle behind the UN’s common but differentiated responsibilities, or CBDR, approach acknowledges that all countries share a collective responsibility to address global environmental issues although they will have different capabilities and varying historical contributions.

Developing countries are the least responsible for historical carbon emissions. The burning of fossil fuel across the Global North led to early economic growth and development, and now the consequences of industrialization are felt globally.

Because developed countries benefited from their early industrialization—in part at the expense of the environment—many argue they now have a moral obligation to shoulder the burden of addressing climate change. This includes helping the Global South reduce emissions by investing in cleaner technologies and offering other financial assistance.

Many countries in the Global South lack the financial resources and infrastructure to drive a switch to clean energy, such as solar and wind power. They also have limited access to green technologies, making it harder to transition to low-carbon economies. Providing access to affordable electricity is a crucial issue for some developing countries, which needs to be balanced against cutting emissions.

Border carbon adjustments imposed by the Global North also could harm trade in the Global South. These measures, such as the EU’s Carbon Border Adjustment Mechanism, are a tax or charge applied on goods such as iron, steel, aluminum, and cement, when they’re imported into an area with a high carbon price from an area with a low or no carbon price.

The goal is to make sure imported goods are charged the same carbon price as goods produced locally. This is to stop companies from moving production to countries with lower carbon prices, which would undermine efforts to reduce emissions (so-called carbon leakage). But these adjustments can penalize exports from developing nations that have higher carbon footprints due to a lack of access to clean energy, or by imposing an administrative burden.

There is hope that the Global South can begin to achieve equity. While few developing countries have carbon taxes, many already have some kind of fuel duty. It should be possible to modify the existing law to ensure part of that duty relates to the carbon content of the fuel, so converting it into a carbon tax. Doing so can raise revenue (if the duty is proportionately increased) and create the right price signal to encourage emissions reduction.

There are many factors to consider when introducing a carbon tax, such as recycling revenue to address regressive effects and raising the tax level slowly according to a well-publicized time frame so industry and consumers can adjust. The UN Handbook on Carbon Taxation for Developing Countries contains helpful guidance in this regard.

Another benefit of introducing a carbon tax, or converting an existing fuel tax into one, is that it should reduce the negative impact of any border carbon adjustment. The developing country should receive a credit for the tax it collects against any adjustment applied to goods it exports to another country.

Revenue from carbon taxes or border carbon adjustments in wealthier nations could be used to support climate adaptation and mitigation in the Global South, helping them transition to greener economies without sacrificing development goals. With the right support, carbon taxation can drive investments in renewable energy, energy efficiency, and sustainable agriculture in the Global South, promoting long-term sustainable development.

Some advocates call for more equitable models, such as differentiated carbon pricing. This could mean for example pushing for global carbon pricing but accepting that prices set should be differentiated depending upon a country’s development.

The Global South must be equipped with financial aid, technology, and equitable carbon pricing frameworks to effectively tackle carbon emissions without hindering growth. A collective effort can pave the way for a more sustainable and equitable future for all.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Chris Morgan is global leader for the KPMG responsible tax program.

Write for Us: Author Guidelines