A few arguments in favor of a carbon tax and a new proposal for climate cooperation

Transcription

1 A few arguments in favor of a carbon tax and a new proposal for climate cooperation Robert Schmidt Yale University May 27, 2015 Schmidt: Reasons for a carbon tax + new proposal 1

2 Part 1: Arguments in favor of carbon tax Schmidt: Reasons for a carbon tax + new proposal 2

3 A special property of CO 2 emissions Climate change is a complex issue: uncertainty about damages of emissions, abatement costs, technologies. But: complex disease does not imply complicated treatment. CO 2 emissions have an inherent property that makes it possible to address this problem in a simple way: Virtually every ton of carbon that is extracted eventually ends up in the atmosphere in the form of CO 2. This 1:1 ratio of carbon extraction and CO 2 emissions makes problem easy to deal with from a policy perspective. Schmidt: Reasons for a carbon tax + new proposal 3

4 Don t tax emissions simply tax the carbon when it is extracted from the ground, or imported into the country from another country with a lower carbon price! Schmidt: Reasons for a carbon tax + new proposal 4

5 Two reasons why extraction of carbon should be taxed (rather than CO 2 emissions): Schmidt: Reasons for a carbon tax + new proposal 5

6 Reason 1: Coverage With an extraction tax, almost 100 percent of all CO 2 emissions in a country are covered. This comprises emissions from electricity generation, production, transport, consumption... Every source of CO 2 emissions automatically covered, because price is in the carbon itself. Passed on from producer to producer and to consumers. Goods and services with higher embedded emissions become relatively more expensive. Schmidt: Reasons for a carbon tax + new proposal 6

7 Reason 1: Coverage... Under cap-and-trade, coverage much lower: vast number of emitters. E.g., in the EU-ETS, coverage amounts only to about 45 percent of all CO 2 emissions. Other instruments required to regulate emissions that are not covered (if they can be regulated at all). By contrast: small number of extractors (or importers) of carbon. Schmidt: Reasons for a carbon tax + new proposal 7

8 Reason 2: Transaction costs / bureaucracy Taxing CO 2 emissions (rather than extraction) or cap-and-trade: every emitter needs to keep track of its emissions. For small emitters or households, simply too costly. Significant welfare losses in the form of bureaucratic or transaction costs. Negligible under an extraction tax. Under extraction tax, firms and individuals don t even need to know (or keep track of) their CO 2 emissions. Simply respond to price signals, and shift consumption / production patterns towards lower emissions. Schmidt: Reasons for a carbon tax + new proposal 8

9 Carbon tax vs. cap-and-trade further issues: Additional reasons why carbon (extraction) tax more suitable instrument than cap-and-trade: Related with uncertainty about permit prices. If permit price is high: considerable economic risks (e.g., job losses, firm relocation, economic crisis). If permit price is low (as currently in EU-ETS), society not exploiting its potential to reduce emissions further at low costs. Furthermore, volatile carbon price creates unfavorable environment for investments in low-carbon technologies. Schmidt: Reasons for a carbon tax + new proposal 9

10 In sum: both upwards and downwards shocks in the permit price are undesirable; the obvious way to prevent both of them: Fix the price by implementing a tax! Schmidt: Reasons for a carbon tax + new proposal 10

11 Can we achieve 2-degree target with a carbon tax? Yes, we can. Of course, despite the low coverage, cap-and-trade delivers more certainty about short-run emissions. But: short-run emissions not decisive for climate change. What matters is cumulative emissions since climate gases accumulate in atmosphere and oceans over time. Countries need to limit their cumulative emissions over the next few decades in order to achieve the 2-degree target (with a high probability). But cumulative emissions can be adjusted more easily with a carbon tax than short-run emissions. Schmidt: Reasons for a carbon tax + new proposal 11

12 Can we achieve 2-degree target with carbon tax... If emissions reduction under carbon tax lower in the short run than anticipated, price path can be adjusted upwards (without drastic changes). Emissions might also decline more rapidly than anticipated. In this case tax rate can be raised more slowly over time. Implementing a carbon tax and re-adjusting it over time allows us to learn about the responsiveness of the economy to a price signal. Learning may occur also under cap-and-trade, but tax has the advantage of a stable price signal. Schmidt: Reasons for a carbon tax + new proposal 12

13 Part 2: Balanced efforts proposal for climate cooperation (Nature Climate Change, 2015) Schmidt: Reasons for a carbon tax + new proposal 13

14 Balanced efforts - proposal for climate cooperation Uniform global carbon (extraction) tax: efficient instrument to combat climate change. But: uniform tax implies unequal welfare costs! Possible solution: transfers, but probably too high to be implementable. Climate change problem: another intrinsic property that can be exploited. Two global public goods: reducing emissions, and fostering low-carbon technologies. Schmidt: Reasons for a carbon tax + new proposal 14

15 Balanced efforts - proposal... Suggests way out of the dilemma: If a country suffers less under a uniform global carbon tax or is unable to implement a carbon tax, can contribute more to the other global public good: technology provision. Balanced efforts in climate stabilization : fixed percentage cost of GDP for a country s total efforts (e.g., 2%). Fairness: Poorer countries pay less in absolute terms. Balanced efforts can be achieved even when carbon prices (initially) differ across countries! Schmidt: Reasons for a carbon tax + new proposal 15

16 Balanced-efforts proposal: strategic incentives Weitzman (2014) argues that useful proposal for climate negotiations should focus on one-dimensional target. And embody countervailing force against narrow self-interest. Balanced-efforts approach: countries negotiate one-dimensional target (total effort cost as % of GDP). Pre-commitment to identical efforts (as % of GDP) for all countries (in Weitzman, 2014: identical price). Countervailing force: no interest to vote for low effort-cost target, because other countries then also invest less. Schmidt: Reasons for a carbon tax + new proposal 16

17 Conclusion Highlight that carbon tax (implemented as an extraction and import tax for carbon) is efficient policy instrument to combat climate change. Ideally, all countries implement uniform carbon price. Not realistic: large differences in welfare costs between countries under a uniform tax. And some countries unable to implement tax. Balance countries effort costs in climate stabilization via differentiated investments in low-carbon technologies. Ask those countries that suffer less under uniform carbon tax (or cannot implement tax) to invest more in low-carbon technologies (second global public good). Schmidt: Reasons for a carbon tax + new proposal 17