Global Versus Regional Carbon Taxation: Exploring a Natural Experiment

Abstract

The reduction of global greenhouse gas emissions has priority due to climate change. Scientists across disciplines promote carbon taxation or carbon pricing as an instrument to mitigate the negative externality of fossil energies. We exhibit two insufficiencies of today’s regulatory policy by utilizing a novel natural experiment. First, carbon taxation is only effective if it is implemented on a global scale because fossil energy markets and emissions are cross-border and global. Second, carbon taxation is based on an extrinsic mechanism and does not alter intrinsic behaviour sustainably. Our applied theory and modelling approach is corroborating these findings. The present regulatory approach is doomed to fail due to overambitious European countries and unambitious (partly realistic) rest of the world. Our interdisciplinary analysis unravels a new agenda to achieve the essential aim. What is needed is a global climate club, as proposed by Nobel Laureate William Nordhaus, with a least but global greenhouse gas reduction.