The Brussels-based thinktank Tax Foundation Europe, in a report on Tuesday 18 June, stated that Luxembourg’s carbon tax base is one of the broadest in Europe, covering 72% of its greenhouse gas emissions and ranking as the second-broadest out of 31 jurisdictions studied globally.
According to the foundation, in recent years, countries worldwide have intensified efforts to reduce carbon emissions through regulatory frameworks, emissions trading systems and carbon taxes. Since Finland pioneered carbon taxation in 1990, 23 European countries have implemented carbon taxes, with rates ranging significantly from less than €1 per metric tonne in Ukraine to over €100 in Sweden, Liechtenstein and Switzerland. The average carbon tax rate in 2024 among these 23 European countries stands at €49.23, reflecting varying approaches to pricing carbon emissions across the continent. Luxembourg’s carbon tax rate is slightly lower, at €46.43 per 1,000 kg of CO2 emitted.
EU emissions trading system
All EU member states, along with Iceland, Liechtenstein and Norway, participate in the EU ETS, a regulated market for trading greenhouse gas emission allowances. Switzerland, Ukraine and the United Kingdom operate separate systems due to unique regulatory frameworks. In countries like Estonia, Finland, Latvia and Norway, overlaps between national carbon tax bases and EU ETS emission bases pose challenges, potentially leading to double taxation and resource inefficiencies, said the Tax Foundation. Recent years have seen several European countries transitioning to or implementing carbon taxes, with Germany and Austria integrating carbon taxes into ETSs by 2026, and Albania and Hungary introducing standalone carbon taxes in 2022 and 2023, respectively.
Luxembourg’s carbon tax strategy
Speaking to Delano, Alex Mengden, global policy analyst at the Tax Foundation, said, “Luxembourg’s carbon tax has one of the broadest tax bases in Europe, covering 72% of its greenhouse gas emissions in 2023. This confirms our previous findings in 2022, which ranks Luxembourg’s carbon tax base as the second-broadest out of 31 jurisdictions studied worldwide.”
Mengden added, “Despite its high rank, Luxembourg’s carbon tax base does not overlap with the emissions base of the EU-ETS, managing to avoid distortive double taxation. When national carbon taxes apply to emissions covered by an ETS, they tend to shift the emissions to sources outside of their tax base, introducing inefficient uses of resources while leaving total emissions capped by ETS allowances unchanged.” Mengden clarified that Luxembourg’s ability to achieve such high emissions coverage while avoiding overlaps with the ETS base is due to “a combination of good policymaking and the country’s emissions profile.”
Mengden further noted that the majority of Luxembourg’s greenhouse gas emissions come from the transport sector, which is subject to the carbon tax. In contrast, industrial and power generation operations, covered by the ETS, produce a small share of the country’s carbon emissions. According to the thinktank, Luxembourg’s per capita CO2 emissions from fossil fuels and industry were 11.6 tonnes in 2022.