…environmental economics and the implications of environmental policy

A Taxing Time In Bali

with 3 comments

While we in Canada dig out from three cross-county storms and our GHG emissions peak as all those two stroke snowblowers and plows make life more mobile, one can only think wistfully of Bali and those lucky few climate intelligentsia. Of course there is serious work to be done, and those tasked with working through the current political minefield will be working 24/7. While visions of post-2012 allocation schemes dance in their heads, there is a new and perhaps interesting twist — a call for a global carbon tax that will emerge from Bali.

Given a past political bias towards emission taxes, the emissions price that will continue to dominate the international GHG mitigation regime is of course emission trading. But this bias is not universal, and has ameliorated over time, and thus we now see a range of national and sub-national polices that implement emission taxes. This means that we are moving into a climate policy world where emission pricing is conducted by a mix of carbon trading and carbon taxes, with instances of both implemented concurrently (BC for example). It is not just the economists who are advocating for global carbon tax as part of the post-2012 international regime, but politicians as well. But the question is, can these two emission price options — taxes and trading — be reconciled in a post-2012 global regime? In this post we argue there are a number of reason why the answer is yes.

From an economist’s perspective, the options are reconcilable since both can be designed to mimic each other to ensure similar economic and abatement outcomes are achieved. An oft cited example of this “mixing and matching” of design elements is where a “safety valve” can remove the price uncertainty associated with trading so that total abatement costs are limited. Similarly, an emission tax can be updated up or down so that observed emission outcomes align with desired reduction targets. The advice from economists, therefore, is that the decision to move forward with emission pricing is not an “either/or” decision, but instead how to mix and match these inherently complementary price signals.

This assertion has important implications for the feasibility of a global carbon tax, for if emission taxes and trading are complements, there is scope for a carbon tax in the international regime. But why would it would be appropriate to implement the emission price policies as complements in the post-2012 regime. There are a number of reasons:

• Post-2012 allocations will remain contentious and will take time to sort out, and hence there is an opportunity for a global carbon tax to speed the transition to broader and deeper carbon reductions.

• A global carbon tax could transition newly industrialized countries to the post-2012 regime with binding caps.

• Institutional feasibility in the developing world more closely aligns with taxes rather than trading.

• Competitiveness issues can be lessened if a global carbon tax can be implemented in advance of global emission constraints.

Of course, some political support for a global carbon tax may do little to address “carbon tax” as a four letter word in politics.

Written by Dave Sawyer

December 3rd, 2007 at 3:20 pm

3 Responses to 'A Taxing Time In Bali'

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  1. I figure I’ll keep you company here on your otherwise lonely blog :)

    About a global carbon tax…. I think that this would be a fun spot to do some analysis, because while I agree that a global carbon tax would be effective, I think there are a few reasons that it would be wise to use a carbon tax with rates differentiated by country to reflect:
    – different pre-existing taxation in different countries (most of the double dividend studies suggest that different levels of pre-existing taxes imply different levels of optimal taxation of the pollutant). This might be especially important because many developed countries have most tax incidence on labour/capital while other countries have a bulk of tax burden falling on consumption taxes. Further, Europe, with already high energy taxes, could face further distortions in energy markets through application of a high carbon tax, which we in North America (with low energy taxation relative to EU) wouldn’t see. Even more complicated when the countries with highly subsidized energy are added in).
    – different exchange rates
    – different interest rates

    I think it would be fun to delve into this further. Practically, I’m wonder who would administer a global tax. And wrt to the issue above, I wonder if, given the difficulty I can imagine getting a flat global tax to fly, there would be any possibility of getting a differentiated carbon tax to fly.


    4 Dec 07 at 11:36 pm

  2. Long-time reader (of your stuff, if not this blog), first time commenter. Kudos on the blog…

    I agree with Nic’s points re. global tax vs. nationally differentiated carbon tax (globally applied), and would add a further point made by Greg Mawkin in the NYTimes a while back:

    A major advantage of such a tax over a similarly-constructed trading system (i.e. national systems based on a common trading architecture) is that it deals with one of the key criticism of a global trading system: that it is a massive wealth transfer mechanism. With a national tax, national government raise and ultimately recycle that revenue within the national jurisdiction (unless there are inflation concerns, but that’s a whole other topic). I know you didn’t miss your political economy class in grad school, and that you’ll understand the importance of that point.

    BTW, you have to get your name somewhere in the title of this thing. A Google search for your name and “blog” came up dry. Good thing JB knew where to find you.

    Alex W

    11 Dec 07 at 6:05 pm

  3. .



    27 Jul 14 at 4:01 pm

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