Carbon tax plays a crucial role in promoting green innovation and sustainable development. This systematic literature review analyzes 40 peer-reviewed articles from 2015 to 2025, highlighting the effectiveness of carbon tax in reducing emissions and enhancing fiscal capacity. The study identifies key themes, including its impact on corporate strategies and contributions to achieving Sustainable Development Goals (SDGs). Insights are particularly relevant for policymakers and businesses in developing countries like Indonesia, where implementation challenges persist. This research serves as a valuable resource for understanding the intersection of fiscal policy and environmental sustainability.

Key Points

  • Analyzes 40 peer-reviewed articles on carbon tax from 2015 to 2025.
  • Explores the effectiveness of carbon tax in reducing emissions and enhancing fiscal capacity.
  • Discusses the impact of carbon tax on corporate strategies and green innovation.
  • Examines the contributions of carbon tax to achieving Sustainable Development Goals (SDGs).
  • Highlights challenges in implementing carbon tax in developing countries like Indonesia.
Kavya Mittal
Author:Meiriska Febrianti, Lady Karlinah
14 pages
Language:English
Type:Research Paper
Accounting
Kavya Mittal
Author:Meiriska Febrianti, Lady Karlinah
14 pages
Language:English
Type:Research Paper
Accounting
37
/ 14
Owner: Riset & Jurnal Akuntansi
e –ISSN : 2548-9224 | p–ISSN : 2548-7507
Volume 9 Nomor 4, Oktober 2025
DOI : https://doi.org/10.33395/owner.v9i4.2832
3405
Carbon Tax, Green Innovation, and Sustainable
Development: Evidence from a Systematic Literature
Review
Meiriska Febrianti
1
,Lady Karlinah
2
1
Department of Accounting, Trisakti School of Management, Jakarta, Indonesia
2
Department of Accounting, Faculty of Business and Tourism, Matana University, Tangerang,
Indonesia
aurellya_mf@yahoo.com
1
, ladykarlinah@gmail.com
2
ABSTRACT
This study employs a Systematic Literature Review (SLR) using the PRISMA framework to examine
the role of carbon tax in fostering green innovation and advancing sustainable development. A total
of 40 peer-reviewed articles published between 2015 and 2025 were analyzed from major
databases including Scopus, Web of Science, and Google Scholar. The findings reveal that the
carbon tax not only functions as a fiscal instrument to reduce carbon emissions but also acts as a
catalyst for corporate green innovation and environmental disclosure practices. Three dominant
themes emerged: (1) the effectiveness of carbon tax in reducing emissions and strengthening fiscal
capacity, (2) its influence on corporate strategies to promote green technology and sustainable
business models, and (3) its contribution to achieving the Sustainable Development Goals (SDGs),
particularly in developing economies. While the carbon tax shows significant potential, challenges
such as policy inconsistency, institutional weakness, and industrial resistance remain obstacles to
its full implementation. The review offers guidance for policymakers to integrate fiscal and
innovation policies toward sustainable growth.
Keywords:, Carbon Tax, Green Innovation, Sustainable Development, Tax Policy.
INTRODUCTION
The urgency of addressing climate change has pushed governments, businesses, and societies
to search for more effective policies to reduce greenhouse gas (GHG) emissions. Among the
various instruments available, carbon taxation has emerged as one of the most widely debated and
implemented mechanisms worldwide. By assigning a monetary cost to carbon emissions, carbon
taxes seek to internalize environmental externalities, thereby encouraging polluters to reduce
emissions and adopt cleaner technologies (Meila et al., 2024). Beyond its fiscal function, the carbon
tax represents a strategic policy tool for promoting behavioral change at both corporate and
individual levels (Xie & Jamaani, 2022).
Globally, the adoption of carbon taxation has varied significantly across countries. Developed
economies such as Sweden, Finland, and Canada have long implemented carbon tax schemes with
measurable success in reducing emissions while maintaining economic growth. In contrast,
developing countries face challenges in balancing the need for economic expansion with the
pressure to reduce emissions (Sofiyati & Hernawan, 2023). This global variation highlights the
importance of contextual factors, such as governance structures, institutional capacity, and
economic maturity, in determining the effectiveness of carbon tax policies (Soekarno et al., 2024).
Indonesia, as one of the largest emitters in Southeast Asia, has gradually integrated carbon
pricing into its fiscal reform agenda (Pramita et al., 2024). The government formally introduced
carbon tax legislation in 2021 as part of the Harmonized Tax Law (UU HPP), with implementation
beginning in 2022 and a broader rollout expected in subsequent years. This policy reflects
Indonesia’s commitment to achieving its Nationally Determined Contribution (NDC) targets under
the Paris Agreement and its long-term goal of net-zero emissions by 2060. Carbon tax in Indonesia
Owner: Riset & Jurnal Akuntansi
e –ISSN : 2548-9224 | p–ISSN : 2548-7507
Volume 9 Nomor 4, Oktober 2025
DOI : https://doi.org/10.33395/owner.v9i4.2832
3406
is therefore not only a fiscal innovation but also a central component of the nation’s sustainability
agenda (Dilasari et al., 2022; Sulistyowati et al., 2025).
In addition to reducing emissions, carbon taxes are expected to influence corporate strategies
and drive green innovation (Bui et al., 2021; Ladista et al., 2023; Toumi et al., 2022) . By increasing
the cost of carbon-intensive practices, the tax creates incentives for firms to invest in renewable
energy, cleaner production technologies, and sustainable business models (Putu Dian Pusparini et
al., 2023). This aligns with the broader shift toward environmental, social, and governance (ESG)
practices, which are increasingly demanded by investors, regulators, and consumers. Thus, carbon
tax serves as both a regulatory constraint and a market-driven stimulus for innovation.
However, the effectiveness of carbon taxes in promoting sustainability has been debated.
While some studies highlight their success in reducing emissions and stimulating innovation, others
argue that the outcomes are highly context-dependent (Karlinah et al., 2025). Issues such as policy
design, rate setting, administrative capacity, and industry resistance can significantly affect results
(Pramita et al., 2024). For instance, a carbon tax set too low may fail to incentivize meaningful
change, while one set too high could generate backlash from industries and consumers. These
dynamics make carbon taxation a complex and multidimensional policy instrument.
From an academic perspective, research on carbon tax spans several domains, including
economics, environmental studies, public policy, and corporate governance. Scholars have
explored its fiscal impacts, distributional consequences, political feasibility, and implications for
competitiveness (Meila et al., 2024). More recently, there has been a growing interest in examining
how carbon taxes intersect with green innovation and sustainable development goals (SDGs)
(Halizah & Furqon, 2024). This reflects a recognition that fiscal tools should not be evaluated in
isolation but rather in terms of their broader contributions to sustainability.
Despite this growing body of research, much of the existing literature remains fragmented.
Many studies focus narrowly on the environmental or fiscal impacts of carbon tax, while fewer
explore its relationship with corporate behavior, innovation, and long-term sustainability outcomes.
Moreover, empirical evidence is uneven across countries, with most studies concentrated in
developed economies, leaving gaps in understanding how carbon tax functions in developing
contexts such as Indonesia. These limitations highlight the need for a systematic review that
synthesizes findings across diverse disciplines and geographies.
However, previous studies remain fragmented and lack a systematic synthesis linking
carbon tax, green innovation, and Sustainable Development Goals (SDGs), particularly in
developing countries. Therefore, this study addresses the following research question: How does
carbon tax influence green innovation and sustainable development across contexts?
A Systematic Literature Review (SLR) offers an appropriate method to address this gap.
By applying structured and transparent criteria for article selection and synthesis, an SLR allows
for the identification of consistent themes, divergent findings, and emerging research trends. This
approach not only provides a comprehensive overview of the current state of knowledge but also
offers insights into areas where further research is needed. For policymakers, the results of such a
review can inform the design of more effective carbon tax schemes that align with sustainability
objectives.
This study therefore aims to synthesize academic and professional literature on the nexus
between carbon tax, green innovation, and sustainable development. By reviewing publications
from 2015 to 2025, the research seeks to capture both the early debates and more recent
developments in this field. The review focuses on three main dimensions: the effectiveness of
carbon tax in reducing emissions and enhancing fiscal capacity, its role in shaping corporate
innovation strategies, and its contribution to achieving broader sustainability goals.
Ultimately, this paper contributes to both academic discourse and policy practice.
Academically, it integrates insights from multiple disciplines into a coherent framework for
understanding the multifaceted impacts of carbon tax. Practically, it provides evidence-based
recommendations for policymakers and corporate leaders seeking to align fiscal tools with
sustainability transitions. By situating the analysis within global debates while emphasizing
Owner: Riset & Jurnal Akuntansi
e –ISSN : 2548-9224 | p–ISSN : 2548-7507
Volume 9 Nomor 4, Oktober 2025
DOI : https://doi.org/10.33395/owner.v9i4.2832
3407
relevance for developing countries, particularly Indonesia, this study underscores the
transformative potential of carbon tax in advancing green innovation and sustainable development.
LITERATUR REVIEW
Environmental Tax Theory
The Environmental Tax Theory originates from the economic concept of externalities
introduced by Pigou (1920). In conventional markets, polluters often impose costs on society—
such as air pollution or greenhouse gas emissions—without bearing responsibility for the damage
caused. This leads to market failure, as private costs diverge from social costs (He et al., 2021; Xie
& Jamaani, 2022). A Pigouvian tax, or environmental tax, seeks to correct this imbalance by making
polluters internalize the social costs of their activities (Mikhno et al., 2021; Yudhana & Madalina,
2022). By attaching a monetary value to pollution, governments create incentives for firms and
individuals to reduce environmentally harmful behavior (Adi Prawira & Nur Apandi, 2023).
Applied to climate change, the carbon tax is a specific form of Pigouvian tax designed to
reduce carbon dioxide (CO₂) and other greenhouse gas emissions. By setting a price per ton of
carbon, governments directly influence production and consumption decisions. Industries that rely
heavily on fossil fuels face higher costs, which motivates them to adopt cleaner technologies or
shift toward renewable energy. Similarly, consumers may change their preferences, for instance by
reducing reliance on carbon-intensive goods and services (Nurfatimah et al., 2024). The
environmental tax framework thus provides a clear theoretical justification for carbon taxation as
both an environmental and fiscal instrument (Wang et al., 2022).
Empirical studies across the globe provide evidence supporting Environmental Tax Theory
in the context of carbon tax. Countries such as Sweden and Finland, which implemented carbon
taxes decades ago, have achieved significant reductions in emissions without hindering economic
growth. Their experiences suggest that well-designed environmental taxes can align environmental
goals with fiscal sustainability. However, other cases illustrate the limitations of the theory when
policies are poorly designed or inadequately enforced. For instance, if carbon taxes are set too low
or enforcement is weak, polluters may continue emitting without significant behavioral change.
These variations demonstrate the importance of contextual and institutional factors in shaping
outcomes.
For developing countries like Indonesia, Environmental Tax Theory offers both
opportunities and challenges. On the one hand, carbon taxation has the potential to generate revenue
while simultaneously reducing emissions, aligning fiscal policy with sustainability objectives. On
the other hand, weak enforcement capacity, industrial resistance, and limited public trust may
hinder the realization of theoretical benefits. Thus, while Environmental Tax Theory provides the
foundation for understanding the rationale behind carbon taxation, its practical effectiveness
depends on policy design, administrative capacity, and broader socio-economic conditions.
Porter Hypothesis
The Porter Hypothesis, introduced by Michael Porter and Claas van der Linde (1995),
challenges the traditional view that environmental regulations only impose costs on firms (van
Leeuwen & Mohnen, 2017; Yu et al., 2023). Instead, it posits that well-designed regulations can
stimulate innovation, improve efficiency, and ultimately enhance competitiveness. By increasing
the cost of polluting activities, firms are pushed to seek innovative solutions that not only comply
with regulations but also create new opportunities for growth. This hypothesis has become highly
relevant in the context of carbon tax, where regulation and innovation are closely intertwined.
In the case of carbon taxation, the rising cost of carbon-intensive practices incentivizes
firms to invest in green technologies, improve energy efficiency, and develop sustainable business
models (Albab & Tjaraka, 2024; Wibisono & Soepriyanto, 2024). For example, companies subject
to carbon tax may adopt renewable energy sources, redesign production processes, or create
environmentally friendly products to reduce their tax burden. This dynamic supports the notion that
carbon tax is not only a constraint but also a driver of innovation, reinforcing the dual role of
regulation as both deterrent and catalyst.
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FAQs

How does carbon tax influence corporate strategies for innovation?
Carbon tax raises the cost of carbon-intensive practices, incentivizing firms to invest in sustainable operations. This aligns with the Porter Hypothesis, which suggests that stringent regulations can foster innovation. Evidence shows that companies subject to carbon taxes often increase their research and development expenditures on green technologies. However, smaller firms may struggle to adapt due to resource limitations, highlighting the need for supportive policies to facilitate innovation.
What are the main themes identified in the literature review on carbon tax?
The literature review identifies three dominant themes regarding carbon tax. First, it examines the effectiveness of carbon tax in reducing greenhouse gas emissions and enhancing fiscal capacity. Second, it explores how carbon tax influences corporate strategies, particularly in promoting green innovation. Lastly, the review discusses the implications of carbon tax for achieving Sustainable Development Goals (SDGs), especially in developing countries facing implementation challenges.
What challenges does Indonesia face in implementing carbon tax?
Indonesia faces several challenges in implementing carbon tax, including weak enforcement and limited industrial compliance. The initial tax rate has been criticized as too low to create meaningful incentives for emission reduction. Additionally, political resistance and administrative limitations hinder the effective rollout of carbon tax policies. These dynamics underscore the need for stronger governance and institutional support to align environmental and fiscal goals.
How does carbon tax contribute to Sustainable Development Goals (SDGs)?
Carbon tax can significantly contribute to achieving Sustainable Development Goals (SDGs) by aligning fiscal systems with sustainability objectives. For instance, revenues from carbon tax can be allocated to renewable energy projects and social compensation schemes, enhancing public support. However, in many developing countries, including Indonesia, the lack of transparent revenue allocation limits the potential of carbon tax to act as a strategic tool for advancing SDGs.

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