11 Jul 2017

More on carbon taxes...

In response to So what would a carbon tax really cost?, Stefano Carattini wrote:

We have recently published an advanced review article tackling some of the points that you mention.
From the abstract: Here, we present the main arguments for carbon pricing, to stimulate a fair and well-informed discussion about it. These include considerations that have received little attention so far. We stress that a main reason to use carbon pricing is environmental effectiveness at a relatively low cost, which in turn contributes to enhance social and political acceptability of climate policy
Lobbying definitely plays a key role here, but unfortunately under standard circumstances the general public is not much more open to the idea of a carbon tax (see for instance this).
From the abstract: We examine the determinants of voting and find that distributional and competitiveness concerns reduced the acceptability of energy taxes, along with the perception of ineffectiveness. Most people would have preferred tax revenues to be allocated for environmental purposes... [Given the inefficiency of this choice...] providing information on the expected environmental effectiveness of carbon taxes reduces the demand for environmental earmarking.
I then asked Stefano: Do you think that a series of national carbon taxes (with funds reallocated domestically) is better than an international (but more efficient) tax system? I think that cap and trade is defacto dead as a policy due to its complexity but — worse — its design of shipping money to foreigners. Thus, I think that a national carbon tax (even without border adjustments, but I like that idea of refunding the border adjustment to the exporting country!) is a definite second best…

To which he replied: The question that you ask is a tough one, but I would say that yes, starting with domestic carbon taxes is probably the most feasible solution. The number of countries implementing carbon taxes has been slowly but steadily rising in the last few years. I know of several initiatives trying to tackle the unpopularity of carbon taxes, with the aim to push for (acceptable) national carbon taxes in different countries. For instance, Citizens’ Climate Lobby is also pushing in several countries (starting from the US) the idea of a carbon fee-and-dividend, a carbon tax whose revenues are redistributed through lump-sum transfers (advertised as “checks”). Their plan does include carbon motivated border tax adjustments, as also did the recent initiative by a group of prominent republicans. At some point, British Columbia actually had a serious plan to implement an original version of a border tax adjustment, by taxing carbon-intensive imports.*

The wind may be slowly changing. Firms are also realizing that carbon pricing may be advantageous for them, of course depending on the design, as long as the status-quo is no longer an option.

* DZ: According to this summary, the border tax has not been implemented, perhaps due to the plan to tax carbon across Canada in 2018.

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