Environmental Taxation and Revenue for Development

Abstract

This paper considers the role of global environmental taxes both as instruments for improving the global environment and as a source of revenue for funding economic development. It reviews the general case for environmental taxes and the particular issues that arise for the adoption of such taxes in an international setting without a single jurisdiction. It also discusses the possibilities for political acceptance of such taxes when tax revenue is linked to the goal of economic development. The revenue potential of global environmental taxes is evaluated with special reference to a global carbon tax. It is found that this tax alone has the potential to raise sufficient revenue to finance the United Nations' Millennium Development Goals.

The Public Economics of Climate Change

“…A discussion that ties the proposal for an international carbon tax with some rough estimates of its revenue potential for economic development is Sandmo (2005). 16 Automobile use is an interesting example of an activity that generates multiple externalities.…”

Global environmental taxes

“…Thus, it has been proposed to dedicate the revenues of carbon taxation to international development funding (Atkinson 2004), with the argument that climate change threatens the economic growth of the poorest countries, both through the burdens of mitigation and adaptation and the remaining impacts of climate change (Sandmo 2004). The World Bank estimates annual mitigation costs in developing countries between US$140 billion and $175 billion by 2030, but since this requires mostly up-front investments, the financing needs in the early years are two to three times larger.…”

“…The transfers would not need to equate income levels but they would need to compensate for the differentials in burdens imposed by the cost-minimizing solution. Absent such transfers, a solution with differentiated carbon taxes is closer to a second-best option (Sandmo 2004).…”

“…Their markets are less efficient; they have greater difficulty in preventing tax evasion and making sure that effective and statutory tax rates coincide; and they typically lack the means to offset the adverse distributional consequences of environmental taxes (Blackman and Harrington 2000;Sandmo 2004). Nonetheless, a carbon tax is not the most difficult environmental tax to implement because it need not be charged on actual emissions.…”

“…The only practical solution seems to be to agree on some minimum tax on fossil fuels and let each country decide how it wants to incorporate financing motives or the internalization of local external effects, and how it wants to compensate the users of fossil fuels for the income effects. Lower carbon tax rates in developing countries can be defended following second-best arguments as long as large transfers from developed countries do not compensate them for the heavy mitigation burden imposed on them (Sandmo 2004). Here again, more research is warranted to find practical rules for differentiated harmonized taxes that replace the uniform-emissions-price mantra by taking into account all the subtleties of the real world.…”