Front Matter Page
Fiscal Affairs Department
Authorized for distribution by Vito Tanzi
Contents
Summary
I. Objectives and Scope of the Paper
II. Background: Potential Consequences of Excessive Carbon Emissions
A. Macroeconomic Consequences of Global Warming and Climate Change
B. International Efforts to Control Global Warming To Date
C. Adoption of Carbon Taxes To Date
III. Carbon Taxes as Compared to Other Economic Instruments
A. Alternative Economic Instruments
B. Major Advantages of Economic Instruments
C. Carbon Taxes Versus Tradable Permits
D. Design of Carbon Tax
E. Alternative Uses of Carbon Tax Revenues
IV. Effects of a Carbon Tax on Economic Growth
A. Pre-1995 Studies
B. More Recent Studies
V. Effects of a Carbon Tax on Equity and Income Distribution
A. Potential Winners and Losers
B. Alternatives for Mitigating Negative Distributional Impacts
VI. Effects of a Carbon Tax on a Country’s International Competitiveness
A. Competitiveness at the Firm Level
B. Competitiveness at the Country Level
VII. Prospects for the Global Adoption of Carbon Taxes
VIII. Summary and Policy Conclusions
Tables
1. Estimates of Annual GDP Losses in Different Regions of the World Resulting from Doubling of CO2 Emissions
2. Estimates of Reductions in Projected GDP in Different Regions of the World Resulting from Assumed Reductions in CO2 Emissions
3. United States: Estimated Effect on GDP of Stabilizing Emissions at 1990 Levels When Alternative Sets of Assumptions are Valid
4. Results of Empirical Studies on the Redistributive Impact of a Carbon Tax
5. Estimates of Costs of a Carbon Tax by Region and by Model
References
Appendix
Annotated Summary of More Recent Literature
SUMMARY
Many industrial countries have agreed to binding reductions of greenhouse gases under the Kyoto Protocol. A carbon tax is one of the most efficient instruments available to achieve this objective. While such a tax could generate substantial revenue, it could also reduce the rate of economic growth, worsen the distribution of income, and erode the competitiveness of a country’s exports. This paper reviews the literature for empirical evidence on the seriousness of the carbon tax’s macroeconomic impacts.
The effect of a carbon tax on economic growth depends on the choice of model, the assumptions underlying the model, and the use to which carbon tax revenues are put. When the model contained “optimistic” assumptions, such as a strong response of economic agents to the tax, ready availability of cheap alternative fuels and technologies, and efficient recycling of available revenues, the tax was shown to have little to no negative effect on growth.
Most studies show the distributional impact of a carbon tax to be generally regressive but its degree varies by country, by type of model used, and by how the tax burden is measured. The studies establish that the regressivity of the tax can be greatly offset by proper mitigation, such as exemption or relief, or by compensatory measures, such as wage subsidies or earned income tax relief.
The effect of carbon taxes on exports could be substantial, but studies show that increased costs of production can be offset by reductions of payroll and income taxes that carbon tax revenues could make possible. An international agreement to adopt carbon taxes in a coordinated fashion would greatly reduce the fears of a loss of export competitiveness.
If the Kyoto Protocol on global warming is ever implemented, carbon taxes could be central to the development of an efficient policy mix.