Carbon tax and tourism consumption

Mỹ Huyền Trần
Oct 3
2 min read

Latest research article by Dr. Nguyen Phuc Canh, HAPRI's Senior Researcher.

Implementing a carbon tax reshapes tourism patterns. Domestic tourism spending drops by around 12%, while outbound tourism shows a slight increase. The mechanism points to higher price levels as the main driver: households face rising costs at home, which discourages local travel but leaves foreign trips largely unaffected.

How does the implementation of a carbon tax affect tourism consumption, particularly domestic and outbound tourism spending, and through which channels such as income and price levels are these effects transmitted?

A Growing Wave of Carbon Taxes

The global adoption of carbon taxes remained modest throughout the 1990s, but momentum picked up sharply after the Kyoto Protocol in 2005. This turning point marked the beginning of a steady rise in the number of countries implementing such policies, as illustrated below.

Trends in carbon tax implementation 1995–2029

Kyoto Protocol as a Catalyst for Carbon Taxes

The analysis shows that the Kyoto Protocol 2005 accelerated carbon tax adoption, with post-treatment results indicating a rising likelihood of implementation. To address concerns over staggered difference-in-differences models, the study applies fixed-effects counterfactual estimators, which correct biases from heterogeneous treatment timing and generate more reliable counterfactual outcomes.

The impact of the Kyoto Protocol on carbon tax implementation.

Key Findings

Implementing a carbon tax reduces domestic tourism spending by about 12%. This aligns with the idea that higher travel costs, especially transportation costs, discourage domestic trips.

A carbon tax has a positive effect on outbound tourism spending. Wealthier households, who are more likely to travel abroad, are less affected by rising domestic costs, leading to substitution from domestic to outbound tourism.

The tax increases inflation, which reduces domestic tourism while stimulating outbound travel. At the same time, the tax negatively affects income (GDP per capita), which reduces outbound tourism but has little impact on domestic travel.

Domestic and outbound tourism act as substitutes. As costs rise at home, travelers reallocate spending toward outbound trips, highlighting inequality in tourism opportunities.

When carbon taxes are combined with Kyoto Protocol commitments, the negative effect on domestic tourism remains strong, showing that broader environmental policies reinforce the trade-off with tourism.

Policy Implications

Governments should implement complementary measures such as subsidies, tax breaks, or targeted assistance to protect domestic tourism businesses from higher costs triggered by carbon taxation.

While carbon taxes are vital for climate action, they can unintentionally hurt tourism demand at home. Policymakers must adopt a balanced approach that secures both sustainability and the economic vitality of tourism.

Since carbon taxes disproportionately affect lower-income households (who mainly travel domestically), policies should mitigate regressive effects, ensuring that sustainable transitions do not widen income-based tourism gaps.

More detailed, industry-specific data and studies on long-term effects are needed. Policymakers should invest in monitoring and adaptive strategies to understand how carbon taxes and environmental regulations shape different tourism markets over time.