Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account

Abstract

Fiscal considerations may shift governmental priorities away from environmental concerns: Finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter's ability to counteract carbon policies. Further, no green paradox occurs -instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.JEL Classification: F21, H21, H30, H73, Q38

Climate policies and nationally determined contributions: reconciling the needed ambition with the political economy

“…One solution may be to price carbon emissions at a level that is acceptable in a given country context, 8,9 and to use carbon revenues to protect those negatively affected or generate other growth and development benefits. 10,11 For instance, cash transfers can be used to correct distributional impacts of carbon taxes, and other taxes can be reduced to enhance the efficiency and fairness of the fiscal system. [12][13][14] Another approach is to select policy instruments that minimize abrupt disruption, such as performance or energy efficiency standards and feebates schemes that redirect investment toward zero-carbon capital without affecting directly those responsible for today's emissions.…”

Taxation of Economic Rents

“…Otherwise, income taxation is a more suitable method of redistributive taxation. Franks et al (2017) give an apparent counterexample to the claim that resource rents should not be taxed. In the paper, the government of a resource-importing economy taxes CO 2 emissions in order to capture the rent of the resource exporter.…”

“…3. Franks et al (2017) assume the rents to be scarcity rents. According to the empirical evidence in Section 3.1, it is not clear to which resource this assumption could apply.…”

Towards a comprehensive approach to climate policy, sustainable infrastructure, and finance

“…First, in most countries, revenues from national carbon pricing schemes, in line with limiting global temperature increase to well below 2°C, would be sufficient to provide universal access to key infrastructure services and thus help to achieve Sustainable Development Goals (Jakob et al, 2016) (see Figure 4). Second, carbon pricing may be a lever to increase the economic efficiency of the tax system, especially in economies subject to harmful tax competition (Franks et al, 2015) and economies with large informal sectors, as evading taxes on fossil fuels is less likely than evading sales or income taxes (Markandya et al, 2013;Liu, 2013). By substituting income or value added taxes with green fiscal reforms, adverse effects on the poorest members of society can be avoided.…”