İ.Ü.Siyasal Bilgiler Fakültesi Dergisi
No: 23-24 (Ekim 2000-Mart 2001)
l-Introduction
Water vapour and the greenhouse gases-carbon dioxide,chlorofluorocarbons,methane, nitrous oxide and ozone –permit the sun’s radiation to reach the earth surface,but have trapping effect on the earth’s outbound radiation,this trapping effect is known as the greenhouse effect (Cline,1991,p.904).Because of this greenhouse effect,the average earth’s temperature increases and this increase leads to global warming.In other words,even though there are many scientific uncertainties about the greenhouse effect and we don’t have enough knowledge about the costs of global warming,we know,for the time being,the accumulation of greenhouse gases in the atmosphere increases and this increasing accumulation leads to changes in global climate.
The most important greenhouse gas made by humanbeing is carbondioxide.For this reason,to deal with the global warming problem,we should slow down carbon dioxide emissions.In order to control this gas emission,there are two basic control instruments:global carbon tax and global tradeable carbon dioxide permits.Because in this paper on carbon tax,aiming to examine the main characteristics and some effects of the tax,we left a study on the theory and political economy of a carbon tax to our another paper.This paper is divided in three sections.Section 2 describes the main characteristics of a carbon tax.Section 3 provides an overview of some recent studies on carbon tax in order to give some insights in understanding the effects of a carbon tax.The last section is a summary section.
2-What is a Carbon Tax?
The imposition of a Pigouvian tax,equal to the difference etween marginal
social cost and private marginal cost increases social welfare through
internalizing the externality into private costs.Because an environment tax aims to internalize
the negative externality
caused by polluting activities into private costs,this tax is a
Pigouvian tax (Barthold, 1994 ,p.135). The carbon tax ,as an environment tax is an
externality-correcting device aiming to internalize the negative global externality associated with carbon dioxide emissions
into private costs.Because the imposition of the carbon tax on fossil fuels
equalizes the marginal social costs of reducing carbon emissions equals to the
marginal social benefits of slowing
down the global warming,atmosphere
will be efficiently utilized in respect to carbon emissions(Herber and
Raga,p.259).
In order to control carbon dioxide emission
efficiently,the carbon tax should be proportional to the carbon content of each fossil fuel.For example,coal
contains more carbon than natural gas,in other words,coal burned emits more
carbon dioxide per unit of energy than natural gas.In this reason,the tax on
coal should be heavier than that on natural gas.(Poterba, l991,p.52 and
Pearce,1991,p.945.). On the other hand,whether the tax levels on fossil fuels
should be changed over time is
related to the stock of carbon dioxide in the atmosphere(about this
problem,see Ulph and Ulph,1994 ;and
Sinclair,1994).
In order to capture the negative externality associated with carbon
dioxide emissions,a carbon tax base should be defined in specific,not ad valorem
terms.Since the physical amount of
fuel used to produce energy is linked to carbon emissions, a carbon tax may been
harmonized across countries by the destination principle of international
trade.Moreover,this principle helps
reduce trade distortions ( Herber and
Raga,1995,pp.257-258).
Even though a carbon
tax is an environment tax,imposed
to internalize the negative externality associated with carbon dioxide
emissions,it raises the total tax revenue.On the other hand,firms and
consumers will resist any new tax and politicians are reluctant to impose a new
tax like a carbon tax.If a carbon tax is introduced as a package of fiscally
neutral measures like reducing distorting taxes such as income tax or payroll tax,this enhances the
acceptability of a carbon tax.Governments
taking attention to this double dividend feature[1] may use the carbon
tax revenue to reduce distorting taxes(Pearce,1991,p.940).
The function of a carbon tax,proportional to carbon content of fossil
fuels is to substitute less or non-carbon emitting energy sources for oil and
coal.In other words,this tax leads to use less fossil fuels.Because global
warming is a global problem affecting all people in the world, the solution for
this negative global externality needs international
coordination.Unilateral national carbon emission abatement policies make
reaching the efficient carbon emission level in the world impossible.There are
several reasons for this result(Poterba,1993,pp.48-49).First of all,each country
acting alone doesn’t take attention to the benefits that accrue to other
countries.Second reason is that it is impossible to stabilize carbon emission
for a single country,Thirdly,due to international competition,it is not easy to
pursue a policy a policy in order to reduce carbon emission level for a single
country.The last one is that unilateral national policies doesn’t reach the
least-cost result of reducing
carbon emission.
However,international
coordination is needed to achieve the effective solution of limiting carbon
emission,coordinated international action in order to accept an international
carbon tax doesn’t seem possible.Generally,international coalitions for
environmental problems are voluntary in nature,a single country benefitting from
an international environmental aggrement,participate in the aggreement,otherwise
doesn’t participate(see for the details in the international
coordination,Barrett,1994).
The
reduction in carbon dioxide emissions is achieved by the differences in the
level of the tax on fossil fuels,e.g.coal ,and natural gas.A carbon tax is one of the least-cost policies in
order to slow down global warming.But ,there is a suspicion about the economic effectiveness of the
carbon tax(Kaufmann,1991).For example,in some countries and some sectors,the
interfuel substitution toward natural gas is offset,in part,by the substitution
of oil for natural gas.Because of this last substitution,the economic
effectiveness of a carbon tax is reduced..Interestingly,the increase in the
price of natural gas relative to oil is the result of the carbon tax and of
course,this price increase brings about the unexpected substitution.The increase
in the price of natural gas relative to oil mainly in the industrial sector
affects significantly the economic effectiveness of a carbon
tax.
This tax has
distributional effects like all taxes.The argument about that a carbon tax burden will be
borne by low-income families is based on the fact that the ratio of consumption
for the fuels to income declines as the income rises.But,if a carbon tax burden
is analyzed relative to lifetime income, not to current income,the regressivity
of this tax declines(Poterba,p.56).
If the costs of limiting carbon emissions are much greater than that of
global warming,we can say that it is rational not to levy a carbon tax to reduce
carbon emissions.For this reason,it is very important to have data about the costs of carbon
tax.
In order to estimate the costs of limiting carbon emissions,the economic
models start from a target carbon emission level and then estimate of the carbon
tax required to reduce emissions to this target level. The cost of limiting carbon emission is
linked to a carbon tax level and the tax level is bound to the target emission
level.The reduction in gross national(or domestic) product(GNP) due to the
carbon tax depends on the substitution elasticities of the particular
model(Cline,1992,pp.146-147).
It is possible to show the usual relationship between the carbon tax
level and its economic cost by the figure below.
Figure 1:Carbon tax level and economic cost
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TL/ton |
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T2 |
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T1 |
a |
b |
c | |
X1
X2
Co
Carbon reduction (tons)
Source:Cline(1992)p.148
In
the figure,the horizontal axis reads the number of tons of carbon
cut(X)and the limiting carbon emission may reach up to a maximum of the
entire initial carbon level(Co).Co shows the entire initial carbon
level.The vertical axis shows the tax level in order to reduce carbon emission
to the level required.For example,a cutback of X1 tons requires a tax of
T1.
The tax curve which is nonlinear here is the tax curve showing the
opportunity cost of the carbon.The area labeled by a equals the total
economic cost caused by a carbon tax of T1 .On the other hand,the tax
revenue coming from the tax of T1 is shown by the area of (b+c).This area is measured by
(T1(Co-X1)).
3.Some Recent Studies on Carbon
Tax
In this section, because
aiming to give some insights
in understanding the effects of a carbon tax,we provide an overview of some
recent studies on carbon tax.
Manne and Richels(1991)
They explored how the costs of limiting carbon dioxide emissions are
likely to vary among regions of the world.Their model uses 1990 base year
statistics.71 % man-made carbon emissions originated from the industrialized
countries in 1990.The projections made include 11 ten-year time intervals
through 2100.In this study,it is assumed that the USA,other OECD
countries(Western Europe,Canada,Japan,Australia and New Zealand),former Soviet
Union and Eastern Europe agree to stabilize carbon emissions at their 1990
levels by the year 2000,and the degree by degree reduce them by 20% thorough the
year 2020.They assume further that the developing countries,China and the rest
of the world,accept the limitation about their emissions to double their 1990 levels by the year 2020.In
the light of these limitations,the main results of the study are as
follows:
-In the absence of an international aggrement,carbon emissions are likely
to increase considerably.
-In the USA,from 2000 by 2030,the cost of the carbon constraint is 3% of
the total annual US.GDP.
-For the other OECD countries cited above,after the year 2010,they bear
annualy 1-2 % of the total consumption as a consequence of the carbon
limitations.
-Former Soviet Union and Eastern Europe bear more burden than the USA and
the other OECD countries.Their cost is equal to 4 % of their total
consumption.
-China’s lost exceeds annualy 10% gross domestic product(GDP) by the
second half of the 21st century.
-The rest of the world including OPEC(Organization of the Petroleum
Exporting Countries),Mexico and other potential oil exporters bear a lost
annualy 5% of GDP from 2020 to the end of the 21st
century.
-In order to achieve 20 % reduction of the carbon emission of 1990
levels,long-run equilibrium tax level is $ 250 per ton carbon.Because of this
tax,international price of petroleum rises to $90 per
barrel.
Jorgenson,Slesnick and
Wilcoxen(1992)
This study analyses the effect of a carbon tax on equity in the
distribution of lifetime welfare in the United States.In order to estimate the
effect of this tax on the distribution of welfare among households,an
intertemporal general equilibrium model of the U.S.economy is employed in the
study.The tax revenue coming from a carbon tax doesn’t affect government
spending.The revenue is used to reduce the average tax rate on labor income to
hold the government deficit constant,but marginal tax rate on labor income isn’t
changed.In the study,a utilitarian social welfare function is employed .In order
to stabilize carbon dioxide emissions at the 1990 levels, a carbon tax is
imposed.For example,this tax level is $17,65 per ton of carbon in the year
2020.This means a carbon tax of $11,46 per ton of coal,$2,41 per barrel of
oil,etc.The basic results of this study are as follows:
-Social welfare decreases because of a carbon tax.
-For this tax increases the prices of fossil fuels and changes the
relative prices of all commodities,firms and households substitute away from
fossil fuels leading to different expenditure patterns
-This carbon tax is regressive in the relative sense,but this regresivity
is extremely small in
the
U.S.economy.
Nordhaus(1993)
This
study employing a dynamic integrated climate-economy model(DICE model)analyses
the effects of different greenhouse gas reduction scenarios specified for the
United States.The DICE model includes two important functions;the climate-damage function and the
greenhouse gas-reduction cost function.There are two alternative control
strategies in the study.One of them is called as the optimal policy aiming to maximize the objective
function.Secondly,the study analysis the effects of 20% emissions reductions
from 1990 levels.The results of the study are as follows:
-For
the optimal policy,required carbon tax level is $5,24 per ton carbon and
the emission control rate is 8,8
%.The tax level rises and reaches about $20 per ton carbon by the end of the
21st century
-For the second alternative ,the emission control rate is 30,8 %.This
alternative requires a carbon tax
of $55,55 per ton carbon.having a net annual costs
of $ 762 billions.
-If the tax revenue coming
from a carbon tax which the optimal policy requires,is used to cut the taxes
having excess burden,the optimal control rate rises from 8,8% to 31,7 % and the
optimal carbon tax level rises from $5,24 to $59 per ton carbon in the first ten
years.A net annualized gains rise
from $16,39 billions to $ 205,97 billions.
Kverndokk(1993)
This study assumes that the world has agreed on a treaty
to reduce carbon dioxide emissions by 20 % of 1990 level from the year 2000 to
2100.The cost-effective approach requires that the abatement costs should be
minimized by a tax (or another instrument)toreach the target emission
level.The main results of the study are as
follows:
-The cost-effective approach requires the highest carbon dioxide
reductions should be taken by the regions with the lowest abatement costs.This
leads to that Western Europe,Canada,Japan,Australia and New Zealand take the
bulk of the reductions after 2000.
-The abatement costs are relatively high in the developing countries,due
to large reserves of domestic
coal,limited energy substitution possibilities and rapid economic
development.Therefore,the developing countries are allowed to increase their
emissions above the 1990 levels.
-Because a uniform carbon tax equalizes the marginal abatement costs of
reducing carbon dioxide
emissions,this tax leads to the
least-cost reductions of carbon dioxide emissions.The tax level is $600-700 per
ton carbon in the first half of the
21st century and $300 per ton carbon in the year
2100.
-For the cost effective reduction of carbon dioxide emissions to reach a
target emission level,compared to a uniform percentage reduction minimizes total
abatement costs, the choosing cost-effective approach leads
to the total gains up to 20% off in costs in the beginning of the 21st century.After the year 2030,the
gains from reductions in costs fall significantly.
Gaskins and Wegant(1993)
In this
study,six basic control scenarios specified for the United States, are
analysed.These control scenarios use the same gross domestic
products(GDP),population,resource availability,and technology assumptions,but
considered different levels and rates of carbon dioxide emissions control .A
number of general results of the scenarios specified in order to control carbon
dioxide emissions,are as follows:
-Carbon taxes will generate
substantial tax revenues These extra tax revenues could be used for a
number of purposes like reducing other taxes and financing budget
deficit.
- It
is possible to reduce emissions significantly from their non-controlled level
without substantial GDP losses.
-On
the other hand,the GDP losses could be reduced substantially by using the carbon
tax revenues to reduce existing taxes which have excess
burden
-Because of a carbon reduction program implemented unilateraly by one country
or a group of countries,changes in international energy prices will cause carbon
emissions in other countries to increase relative to non-control levels.This
result shows the importance of a cooperative and multilateral carbon-reduction
program.
Bull,Hassett and Metcalf(1994)
Because they stressed the importance of the measure of the tax burden in
terms of lifetime incidence ,their study aims to measure the lifetime incidence
of energy taxes like carbon tax. This study assumes that a carbon tax (or
another energy tax) is shifted entirely to consumers.The study stresses that for
measuring the lifetime incidence of a carbon tax of $ 5 per ton carbon,it is required to capture all effects(both direct and
indirect) on distribution.While increasing the price of energy sources is the
direct effect,increasing the price of all other goods in proportion to the
energy used to produce them is the indirect effect.The main result of the study
is that because of direct impact of the tax,this tax has regressive effect on
distributional grounds,on the other hand,when the total effect is taken into
account,this tax is roughly proportional.
Berg,Kverndokk and Rosendahl (1997)
In this paper,the effects of
a constant
international carbon tax of $ 10 per barrel of oil($ 90,3 per ton of carbon) on
oil market are studied. .A constant international carbon tax of $ 10 per barrel
of oil equals $ 90,3 per ton of carbon. Because all fossil fuels should be taxed
according to the carbon content,the carbon tax of $90,3 per ton of carbon is
levied on all fossil fuels.It is possible to give the main results of the study
as follows:
-A constant international tax will reduce global carbon dioxide emissions
especially in the long run. A carbon tax of $ 10 per barrel of oil increases
carbon dioxide emissions to 9,2 billion tonnes ,compared to 11,6 billion tonnes without
carbon tax in 2050.
-This tax level reduces the producer price of crude oil by $ 0,2 per barrel and.the consumer
price increases by $ 9,8 per barrel in the first period.This means the tax
burden is initially born almost completely by the consumers.The reason for this
result is decreasing total oil production,not the elasticity of oil
demand.Because OPEC(Organization of the Petroleum Exporting Countries) acts as a
cartel,it reacts to the carbon tax by restricting its production.By the year
2030,the carbon tax is mainly tipped over to the consumers .After 2040,the tax
burden is born completely by the oil producers.It means,after 2040,the consumer
price of the oil is going to be constant.
-There is an interesting result linked to the above that the oil wealth
of OPEC is reduced by 23% because of the carbon tax.
-For the tax
lowers the maximum producer price after the year 2100,to produce coal doesn’t
make sense.
Barker(1999)
This study measures the effects of a carbon tax in the 11 member states
of the European Union .He assumes
the revenues from carbon taxes are used to keep the total tax revenues constant
and each member state reduces employers taxes in the form of contributions to
social security schemes,i.e,carbon tax is a tax-revenue neutral device in order
to control carbon emissions.In order to reduce carbon emissions 10 % below
baseline (the baseline is defined 7 % above 1990 levels by 2010 for the 11
member countries)from 1999 to 2010
carbon tax is used The main results of this study are as follows
:
-For the 11 EU member
states,the carbon tax revenues as a proportion of GDP in current prices rise
from 0,4 % of GDP in the year
2000 to 2,2 % by 2010.This result is the outcome of the 2010 rates of tax .For
the year 2010,to reduce carbon emissions 10% below baseline,the carbon tax of
156 Ecu/ton carbon is needed for multilateral coordinated policy in 1999 prices
This overall tax level rises to 162
Ecu/ton for multilateral uncoordinated policy.
-Another result is almost
all member states(except the Netherlands) benefit from a double dividend feature
of the carbon tax.Employment rises by 1,2%(1,3 in the uncoordinated case)and GDP
rises by 1,4%(1,5 in the uncoordinated case)compared to the base case,that is
without the carbon tax.
4-Conclusion:
The most important
greenhouse gas ,leading global warming is carbon dioxide.For this reason,we
should slow down carbon dioxide emissions.A carbon tax as an environment tax is
one of the instruments to reduce
carbon dioxide emissions to an efficient level.
The carbon tax is a tax on the fossil fuels.This tax should be
proportional to the carbon content of each fossil fuel in order to control
carbon dioxide emission efficiently.For coal contains more carbon than natural
gas and oil,the tax on coal should be heavier than that on oil and natural gas.In
addition,a carbon tax as a Pigouvian tax, should equalize the marginal social
cost and marginal social benefits associated with the global warming problem.But
,it is very difficult or impossible
to measure what the optimal carbon tax level is in
practice.
Because all taxes have distributional effects,does a carbon tax too.The direct impact of a carbon tax is
negative on distributional grounds.But it is possible to reduce the regressivity
of the carbon tax by cutting payroll tax or money transfers to low-income
families.Esspecialy,the use of the carbon tax’s revenue to cut payroll tax has
two positive effects:reducing distorting effect of the payroll tax and
mitigating the regressivity of the carbon tax.
On the other hand,global warming is a global problem affecting all people
in the world.For this reason,the solution for this global externality needs
international coordination.Generally,international coalitions for environmental
problems are voluntary in nature.If a single country benefitting from an
international environmental aggrement,participate in the aggreement.In order to
draw the countries burdening more from reducing greenhouse effect policy into
the coalition,it is needed some compensation instruments such as aid,for a
successful coalition.Even though international coalition to adopt an
international carbon tax seems impossible,some countries,such as Finland and
Sweden,have carbon tax on fossil fuels.
Because the effects of a carbon tax depend on the tax level,the tax
revenue coming from the carbon tax,the elasticities of substitution,the degree
of competition esspecialy in the fossil fuel markets and e.t.c.,we should
evaluate cautiously the results of the studies overviewed
above.
The last thing we should say that because some taxes on fossil fuels
limit yet carbon dioxide emissions,we don’t forget the carbon limiting effect of
these taxes when measuring the carbon limiting effect of replacing of existing
taxes on fossil fuels with a carbon tax .
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*İstanbul Üniversitesi,
İktisat Fakültesi, Maliye Bölümü Öğretim Üyesi.
[1] There is an increasing literature in
the double-dividend feature of environment taxes.As an introduction to the
“double dividend” issue,see Goulder(1995).On the other hand,for one of the last
studies on the double dividend issue,see Holmkund and
Kolm(2000).