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Ireland's carbon tax does not apply to electricity because the cost of electricity is already included in pricing under the Single Electricity Market (SEM). Similarly, natural gas users are exempt from the tax if they can prove they are using the gas to generate electricity.<ref>{{cite web
Ireland's carbon tax does not apply to electricity because the cost of electricity is already included in pricing under the [[Single Electricity Market]] (SEM). Similarly, natural gas users are exempt from the tax if they can prove they are using the gas to generate electricity.<ref>{{cite web
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Revision as of 19:03, 2 August 2010

A coal fired power plant in Luchegorsk, Russia. A carbon tax would tax electricity production using coal.

A carbon tax is an environmental tax that is levied on the carbon content of fuels.[1] Carbon atoms are present in every fossil fuel (coal, petroleum, and natural gas) and are released as carbon dioxide (CO2) when they are burnt. In contrast, non-combustion energy sources—wind, sunlight, hydropower, and nuclear—do not convert hydrocarbons to carbon dioxide. A carbon tax can be implemented by taxing the burning of fossil fuels—coal, petroleum products such as gasoline and aviation fuel, and natural gas—in proportion to their carbon content. Accordingly, a carbon tax increases the competitiveness of non-carbon technologies compared to the traditional burning of fossil fuels, thus helping to protect the environment while raising revenues.

Background

Carbon dioxide: global warming contributor

CO2 is a heat-trapping greenhouse gas (GHG) [2][3] The scientific consensus is that human-induced greenhouse gas emissions are the primary cause of global warming,[4] and that carbon dioxide is the most important of these gases.[5][6][7] Worldwide, 27 billion tonnes of carbon dioxide are produced by human activity annually.[8] The physical effect of CO2 in the atmosphere can be measured as a change in the Earth-atmosphere system's energy balance – the radiative forcing of CO2.[9] Carbon taxes are one of the policies available to governments to reduce GHG emissions.[10]

In the Kyoto Protocol, CO2 emissions are regulated along with other GHGs. Different GHGs have different physical properties: the global warming potential is an internationally accepted scale of equivalence for other greenhouse gases in units of tonnes of carbon dioxide equivalent.

Economic theory

Public finance
Detail from the mural "Government" by Elihu Vedder in the Library of Congress
Policies
Fiscal policy
Monetary policy
Trade policy
Optimum
Reform

A carbon tax is an indirect tax—a tax on a transaction—as opposed to a direct tax, which taxes income. A carbon tax is also called a price instrument, since it sets a price for carbon dioxide emissions.[11] In economic theory, pollution is considered a negative externality, a negative effect on a party not directly involved in a transaction, which results in a market failure. To confront parties with the issue, the economist Arthur Pigou proposed taxing the goods (in this case fossil fuels) which were the source of the negative externality (carbon dioxide) so as to accurately reflect the cost of the goods' production to society, thereby internalizing the costs associated with the goods' production. A tax on a negative externality is called a Pigovian tax, and should equal the marginal damage costs.

Within Pigou's framework, the changes involved are marginal, and the size of the externality is assumed to be small enough not to distort the rest of the economy.[12] Some argue that impact of climate change could result in catastrophe and non-marginal changes.[13] "Non-marginal" means that the impact could, at some time future date, significantly reduce the growth rate in income and welfare. The amount of resources that should be devoted to avoiding low-probability, high cost climate change impacts is controversial.[13] Policies designed to reduce carbon emissions could also have a non-marginal impact.[14]

Prices of carbon (fossil) fuels are expected to continue increasing as more countries industrialize and add to the demand on fuel supplies.[clarification needed] [citation needed] In addition to creating incentives for energy conservation, a carbon tax would put renewable energy sources such as wind, solar and geothermal on a more competitive footing, stimulating their growth.

Social cost of carbon

See also: Economic impacts of climate change § Marginal impacts

The social cost of carbon (SCC) is the marginal cost of emitting one extra tonne of carbon (as carbon dioxide) at any point in time.[15] To calculate the SCC, the atmospheric residence time of carbon dioxide must be estimated, along with an estimate of the impacts of climate change. The impact of the extra tonne of carbon dioxide in the atmosphere must then be converted to the equivalent impacts when the tonne of carbon dioxide was emitted. In economics, comparing impacts over time requires a discount rate. This rate determines the weight placed on impacts occurring at different times.

According to economic theory, if SCC estimates were complete and markets perfect, a carbon tax should be set equal to the SCC. Emission permits would also have a value equal to the SCC. In reality, however, markets are not perfect, and SCC estimates are not complete (Yohe et al.., 2007:823).

An amount of CO2 pollution is measured by the weight (mass) of the pollution. Sometimes this is measured directly as the weight of the carbon dioxide molecules. This is called a tonne of carbon dioxide and is abbreviated "tCO2". Alternatively, the pollution's weight can measured by adding up only the weight of the carbon atoms in the pollution, ignoring the oxygen atoms. This is called a tonne of carbon and is abbreviated "tC". Estimates of the dollar cost of carbon dioxide pollution is given per tonne, either carbon, $X/tC, or carbon dioxide, $X/tCO2. One tC is roughly equivalent to 4 tCO2.[16]

Estimates of the SCC are highly uncertain.[17] Yohe et al. (2007:813) summarized the literature on SCC estimates: peer-reviewed estimates of the SCC for 2005 had an average value of $43/tC with a standard deviation of $83/tC. The wide range of estimates is explained mostly by underlying uncertainties in the science of climate change (e.g., the climate sensitivity), different choices of discount rate, different valuations of economic and non-economic impacts, treatment of equity, and how potential catastrophic impacts are estimated. Other estimates of the SCC spanned at least three orders of magnitude, from less than $1/tC to over $1,500/tC. The true SCC is expected to increase over time. The rate of increase will very likely be 2 to 4% per year.

Carbon leakage

Carbon leakage is the effect that regulation of emissions in one country/sector has on the emissions in other countries/sectors that are not subject to the same regulation.[18] Leakage effects can be both negative (i.e., increasing the effectiveness of reducing overall emissions) and positive (reducing the effectiveness of reducing overall emissions).[19] Negative leakages, which are desirable, are usually referred to as "spill-over".[20]

According to Goldemberg et al.. (1996, p. 28), short-term leakage effects need to be judged against leakage effects in the long-term.[21] A policy that, for example, saw a carbon taxes set only in developed countries might lead to leakage of emissions to developing countries. However, a desirable negative leakage could occur due to a lowering in demands of coal, oil, and gas from the developed countries and thus the world prices. This will lead to developing countries being able to afford more of any fossil fuel type, thus being able to substitute more oil or gas for coal, in effect lowering their national emissions. In the long-run, however, if the transfer of less polluting technologies is delayed, this substitution by income effects might have no long-term benefit.

Border adjustments, tariffs and bans

A number of policies have been suggested to address concerns over competitive losses due to one country introducing a carbon tax while another country does not.[22] Similar policies have also been suggested in an attempt to induce countries to introduce carbon taxes. Suggested policies include border adjustments, trade tariffs and trade bans.

Border adjustments would account for emissions attributable to imports from nations without a carbon price. An alternative would be trade bans or tariffs applied to non-taxing countries. It has been argued that such approaches could be disadvantageous to a target country as a trade measure (Gupta et al.., 2007). To date, World Trade Organization case law has not provided specific rulings on climate-related taxes.

Other types of taxes

Two other types of taxes that are related to carbon taxes are emissions taxes and energy taxes. An emissions tax on GHG emissions requires individual emitters to pay a fee, charge or tax for every tonne of greenhouse gas released into the atmosphere[23], while an energy tax is charged directly on the energy commodities.

In terms of mitigating climate change, a carbon tax, which is levied according to the carbon content of fuels, is not a perfect substitute for a tax on CO2 emissions.[24] For example, a carbon tax encourages reduced use of fossil fuels, but it does not provide an incentive to mitigate or improve mitigation technologies, e.g. carbon capture and storage.

Energy taxes increase the price of energy uniformly, regardless of the emissions produced by the energy source (Fisher et al.., 1996, p. 416). An ad velorem energy tax is levied according to the energy content of a fuel or the value of an energy product, which may or may not be consistent with the emitted amounts of green house gases and their respective global warming potentials. Studies indicate that to reduce emissions by a certain amount, ad velorem energy taxes would be more costly than carbon taxes.[10] However, although CO2 emissions are an externality, using energy services may result in other negative externalities, e.g., air pollution. If these other externalities are accounted for, an energy tax may be more efficient than a carbon tax alone.

Petroleum (motor gasoline, diesel, jet fuel)

Many OECD countries have taxed fuel directly for many years for some applications; for example, the UK imposes duty directly on vehicle hydrocarbon oils, including petrol and diesel fuel. The duty is adjusted to ensure that the carbon content of different fuels is handled with equivalence.[25]

While a direct tax should send a clear signal to the consumer, its use as an efficient mechanism to influence consumers' fuel use has been challenged in some areas:[26]

  • There may be delays of a decade or more as inefficient vehicles are replaced by newer models and the older models filter through the 'fleet'.
  • There may be political reasons that deter policy makers from imposing a new range of charges on their electorate.
  • There is some evidence that consumers' decisions on fuel economy are not entirely aligned to the price of fuel. In turn, this can deter manufacturers from producing vehicles that they judge have lower sales potential. Other efforts, such as imposing efficiency standards on manufacturers, or changing the income tax rules on taxable benefits, may be at least as significant.
  • In many countries fuel is already taxed to influence transport behavior and to raise other public revenues. Historically, they have used these fuel taxes as a source of general revenue, as their experience has been that the price elasticity of fuel is low, thus increasing fuel taxation has only slightly impacted on their economies. However, in these circumstances the policy behind a carbon tax may be unclear.

Some also note that a suitably priced tax on vehicle fuel may also counterbalance the "rebound effect" that has been observed when vehicle fuel consumption has improved through the imposition of efficiency standards. Rather than reduce their overall consumption of fuel, consumers have been seen to make additional journeys or purchase heavier and more powerful vehicles.[27]

Calculation

A carbon tax that compensates for the SCC varies by fuel source. The carbon dioxide production of the fuel source per unit mass or volume is multiplied by the SCC to obtain the tax. Based on the mean peer reviewed value ($43/tC or $12/tCO2), the table below estimates the tax:

Fuel CO2 Emissions[28]
(mass of CO2 produced) 		Tax
(per fuel unit) 		CO2 Emissions[28]
(mass of CO2 produced) 		Tax per kWh of electricity[29]
gasoline 19.6 lb/US gal (2.35 kg/L) $0.11/USgal ($0.42/L) n/a n/a
diesel fuel 22.4 lb/US gal (2.68 kg/L) $0.12/USgal ($0.45/L) n/a n/a
jet fuel 22.1 lb/US gal (2.65 kg/L) $0.12/USgal ($0.45/L) n/a n/a
natural gas 0.1206 lb/cu ft (1.93 kg/m3) $0.00066/cu ft ($2.50/m3) 117 lb/MBTU (181 g/kWh) $0.0066
coal(lignite) 2791 lb/ton (1.396 kg/kg) n/a 215 lb/MBTU (333 g/kWh) $0.0121
coal(subbutuminous) 3715 lb/ton (1.858 kg/kg) n/a 213 lb/MBTU (330 g/kWh) $0.0119
coal(butuminous) 4931 lb/ton (2.466 kg/kg) n/a 205 lb/MBTU (317 g/kWh) $0.0115
coal(anthracite) 5685 lb/ton (2.843 kg/kg) n/a 227 lb/MBTU (351 g/kWh) $0.0127

Note that the tax per kWh of electricity depends on the thermal efficiency of the generating power plant, which varies from power plant to power plant. The table follows the American Physical Society (APS) estimate of 10.3 BTU/Wh (33%). APS notes that "It is expected that future plants, especially those based on gas turbine systems, often will have higher efficiencies, in some cases exceeding 50%." A theoretical conversion rate of 100% is 3.412 BTU/Wh. A more practical limit for thermal power plants is Carnot's theorem.

Implementation

Both energy and carbon taxes have been implemented in responses to commitments under the United Nations Framework Convention on Climate Change.[10] In most cases where an energy or carbon tax is implemented, the tax is implemented in combination with various forms of exemptions.

Australasia

Australia

Main articles: Garnaut Climate Change Review and Carbon Pollution Reduction Scheme

A cap-and-trade scheme or a carbon tax are options which are being considered in Australia.[30] In 2007, the Productivity Commission suggested that a carbon tax should be implemented.[31] Currently, the government seems intent on pursuing a cap-and-trade.

On 30 April 2007 the state Labor Governments commissioned the Garnaut Climate Change Review, whose sponsorship was joined by the Rudd Government soon after taking office in December 2007. The resulting report, delivered on 30 September 2008, recommended an Emissions trading cap-and-trade system. Subsequently the Rudd Government proposed a Carbon Pollution Reduction Scheme, which after much criticism, was voted down in the Australian Senate by both the Australian Greens (for being too ineffective), and the conservative Coalition (Australia) (for the effect on key economic sectors), as well as independent Senators Nick Xenophon [32] and climate change sceptic Steve Fielding.

The Australian Greens are now proposing a interim Carbon tax of $A23 a tonne for two years.[33]

In April 2010 a proposal was published by academics at the Australian National University for a carbon tax on major polluters (such as coal-fired power stations and oil companies) that would provide increased funding for Australian public hospitals and other health costs associated with climate change.[34]

New Zealand

In 2005, the Fifth Labour Government proposed a carbon tax for New Zealand in order to meet obligations under the Kyoto Protocol. The proposal would have set an emissions price of NZ$15 per tonne of CO2-equivalent. The planned tax was scheduled to take effect from April 2007, and applied across most economic sectors though with an exemption for methane emissions from farming and provisions for special exemptions from carbon intensive businesses if they adopted world's-best-practice standards of emissions.[35]

After the 2005 election, the minor parties supporting the Fifth Labour Government opposed the proposed tax, and it was abandoned in December 2005.[36] In 2008, the New Zealand Emissions Trading Scheme was passed into law.[37]

Europe

In Europe, a number of countries have imposed energy taxes or energy taxes based partly on carbon content.[10] These include Denmark, Finland, Germany, Italy, the Netherlands, Norway, Slovenia, Sweden, Switzerland, and the UK. None of these countries has been able to introduce a uniform carbon tax for fuels in all sectors.

European Union

During the 1990s, a carbon/energy tax was proposed at the EU level but failed due to industrial lobbying.[38]

Denmark

Between 1990 and 2006, Denmark's GDP grew at roughly 2.3% a year, more than Europe's average of 2%. Denmark also reduced carbon emissions by 5%. According to World Bank (2010, p. 218), a carbon tax, combined with other policies, have contributed to this separation (decoupling) of economic growth and emissions.[39]

Finland

Finland was the first country in the 1990s to introduce a CO2 tax, initially with few exemptions for specific fuels or sectors.[40] Since then, however, energy taxation has been changed many times and substantially. These changes were related to the opening of the Nordic electricity market. Other Nordic countries exempted energy-intensive industries, and Finnish industries felt disadvantaged by this. Finland did place a border tax on imported electricity, but this was found to be out of line with EU single market legislation. Changes were then made to the carbon tax to partially exclude energy-intensive firms. This had the effect of increasing the costs of reducing CO2 emissions (p. 16).

Vourc'h and Jimenez (2000, p. 17) stated that arguments based on competitive losses needed to be viewed with caution. For example, they suggested that carbon tax revenues could be used to reduce labour taxes, which would favour the competitiveness of non energy-intensive industries.

France

On September 10, 2009, France detailed a new carbon tax with a new levy on oil, gas and coal consumption by households and businesses coming into effect during 2010. The new carbon tax is 17 euros (25 US dollars) per tonne of carbon dioxide (CO2), which will raise the cost of a litre of unleaded fuel by about four cents (25 US cents per gallon). The tax will not apply to electricity as mostly produced by France's network of nuclear reactors.[41]

On December 30, the bill was blocked by the French Constitutional Council.[42] It considered the bill included too many exceptions and said they were unconstitutional. It condemned the exemptions for industries as being unequal and inefficient, pointing out that less than half the whole emissions would have been taxed and saying it was unfair to apply the tax only to fuels and heating, which accounted for a limited part of carbon emissions.[43]

Ireland

A carbon tax of €15 per tonne was introduced in the 2010 budget (which was delivered in December 2009).[44] In 2004, following a policy review, the Irish government had concluded that a carbon tax was not an appropriate policy option.[45] Ireland's carbon tax does not apply to electricity because the cost of electricity is already included in pricing under the Single Electricity Market (SEM). Similarly, natural gas users are exempt from the tax if they can prove they are using the gas to generate electricity.[46]

Netherlands

The Netherlands initiated a carbon tax in 1990. However, results have not been very positive.[original research?] Statistics show that carbon emissions in the country have actually increased since the tax was implemented, perhaps by as much as 19 percent. The good news: The economy does not appear to have been significantly impacted.

Sweden

On January 1, 1991, Sweden enacted a CO2 tax, placing a tax of 0.25 SEK/kg ($100 or EUR 72 per ton) on the use of oil, coal, natural gas, liquefied petroleum gas, petrol, and aviation fuel used in domestic travel. Industrial users paid half the rate (between 1993 and 1997, 25% of the rate), and certain high-energy industries such as commercial horticulture, mining, manufacturing and the pulp and paper industry were fully exempted from these new taxes.

In 1997 the rate was raised to 0.365 SEK/kg ($150 per ton) of CO2 released.[47] In 2007, the tax was SEK 930 (EUR 101) per ton of CO2.[48] The full tax is paid in transport, space heating, and non-combined heat and power generation. Owing to the many exemptions, oil accounts for 96% of the revenues from the tax, although it produces less than three-quarters of CO2 from fuel combustion.

The tax is credited with spurring a significant move from fossil fuels to biomass. As Swedish Society for Nature Conservation climate change expert Emma Lindberg said, “It was the one major reason that steered society towards climate-friendly solutions. It made polluting more expensive and focused people on finding energy-efficient solutions.”[49]

“It increased the use of bioenergy,” said University of Lund Professor Thomas Johansson, former director of energy and climate at the UN Development Programme. “It had a major impact in particular on heating. Every city in Sweden uses district heating. Before, coal or oil were used for district heating. Now biomass is used, usually waste from forests and forest industries.”

Economic growth appears to be unaffected.[original research?] Between 1990 and 2006, Sweden’s economy grew by 44 percent.[49][improper synthesis?]

UK

In 1993, the UK government introduced the fuel duty escalator (FDE), an environmental tax on retail petroleum products. The tax was explicitly designed to reduce carbon dioxide emissions in the transport sector. Since carbon is in fixed ratio to the quantity of fuel, the FDE roughly approximated a carbon tax. The transport lobby in the UK was extremely critical of the FDE. The FDE, which was the UK's only "real" carbon tax, failed because of the political criticism it provoked, and the automatic increase of the FDE was cancelled in 1999.[38] Increases in fuel tax have since been discretionary.

The politically damaging fuel protests in 2000 contributed to the government decision to reduce the real rates of fuel tax. At the time, tax and duty represented more than 75% of the total pump price. In money terms, the past increments of the FDE remain in force, but in real terms, increments have been reduced by the rate of inflation. In 2006, tax represented about ⅔ of the pump price.[50]

Norway

Norway introduced a CO2 tax on fossil fuels in 1991.[51] It is among the highest carbon taxes in the OECD. Carbon taxation is also applied to the production of oil and gas offshore.

According to IEA (2005, p. 49), Norway's CO2 tax is its most important climate policy instrument, and covers about 64% of Norwegian CO2 emissions and 52% of total GHG emissions. Some industry sectors have been granted exemptions from the tax to preserve their competitive position. Various studies in the 1990s, and an economic analysis by Statistics Norway, have estimated the effect of the CO2 tax to be a reduction of 2.5-11% of Norwegian emissions under a business-as-usual approach (i.e., the predicted emissions that would have occurred without the tax).

In January 2008 Norway, along with Iceland and Lichtenstein, joined the EU Emissions Trading System (EU ETS) according to a publication from the European Commission.[52] The Norwegian Ministry of the Environment has also released its draft National Allocation Plan which provides a carbon cap-and-trade of 15 million metric tonnes of CO2, 8 million of which are set to be auctioned.[53]

North America

Canada

In the 2008 Canadian federal election a carbon tax proposed by Liberal Party leader Stéphane Dion, known as the Green Shift, became a central issue in the campaign. It would have been revenue-neutral, with increased taxation on carbon being balanced by tax cuts for individual citizens. However, it proved to be unpopular and contributed to the defeat of Liberal Party with its worst share of the popular vote since Confederation.[54][55][56][57]

Although there is no federal carbon tax, some Canadian provinces do have carbon taxes:

  • Quebec: The Canadian province of Quebec became the first in Canada to introduce a carbon tax[58][59]. The tax was to be imposed on energy producers starting October 1, 2007, with revenue collected used for energy-efficiency programs including public transit.
  • British Columbia: On February 19, 2008, the province of British Columbia announced its intention to implement a carbon tax of $10 per tonne of carbon dioxide equivalent (CO2e) emissions (2.41 cents per litre on gasoline) beginning July 1, 2008, making BC the first North American jurisdiction to implement such a tax. The tax will increase each year after until 2012, reaching a final price of $30 per tonne (7.2 cents per litre at the pumps).[60][61] Unlike previous proposals, legislation will keep the pending carbon tax revenue neutral by reducing corporate and income taxes at an equivalent rate.[62] Also, the government will also reduce taxes above and beyond the carbon tax offset by $481 million over three years.[60] In Jan., 2010, the carbon tax was applied to biodiesel. Looking at just the carbon tax portion, if you apply it (at 3.84 cents/L)equally to fossil and bio-diesel then the penalty/cost per tonne of fossil carbon for each fuel works outas follows: Regular Diesel with 2.68 Kg fossil C/L = $14.31/Tonne Fossil Carbon; Bio-Diesel with 0.15 Kg Fossil C/L = $256.00/Tonne Fossil Carbon. The tiny fossil carbon content in B100 (100% 'neat' biodiesel) will now be penalized at over 17x the rate of fossil carbon in regular diesel.[original research?]
  • Alberta: Alberta has a policy that looks something like a carbon tax.[63]

United States

In November 2006, voters in Boulder, Colorado passed the first municipal 'carbon tax', a tax on electricity consumption (utility bills) with deductions for using electricity from renewable sources (primarily Xcel's WindSource program). Revenues go to fund programs by the city to reduce greenhouse gas emissions.[64]

States

• California

In May 2008, the Bay Area Air Quality Management District, which covers nine counties in the San Francisco Bay Area, passed a carbon tax on businesses of 4.4 cents per ton of CO2.[65]

Some states are considering the imposition of carbon taxes. For example in 2006, the state of California, passed AB-32 which requires California to reduce greenhouse gas emissions. In a effort to execute AB-32, the California Air Resources Board put forth the idea to implement a carbon tax but has yet to reach agreement with the Western States Petroleum Association who represent the refineries in the state. The WSPA holds that AB-32 only allows a carbon tax to cover administrative costs.[6]

Harmonized carbon taxes

Cooper (1998, 2001)[22] has been a leading proponent of a harmonized carbon tax (a tax where the country setting the tax keeps all the revenues). Under his proposals, all participating nations would be subject to a tax at a common rate, thus achieving cost-effectiveness. A number of problems have been suggested with Cooper's proposals:

  • One criticism is of the fairness of having developing countries being subject to the same tax rates as developed countries, given their relative level of welfare and responsibility for the climate problem.
  • It has been asked what incentive developed countries would have to adopt a tax.
  • It is possible that governments would attempt to neutralize the effects of the tax on certain economic sectors.
  • Given the presence of existing tax distortions, it might not be politically feasible to implement a uniform tax rate.

Support

Former US Vice President Al Gore strongly backed a carbon tax in his book, Earth in the Balance, but this became a political liability after the Republicans attacked him as a "dangerous fanatic". In 2000, when Gore ran for President, one commentator labeled Gore's carbon tax proposal a "central planning solution" harking back to "the New Deal politics of his father." [66]

Former US Federal Reserve chairman Paul Volcker suggested (February 6, 2007) that "it would be wiser to impose a tax on oil, for example, than to wait for the market to drive up oil prices."[clarification needed][67]

Climatologist James E. Hansen has argued in support of a carbon tax.[68][69][70][71][72] A number of businesses and business leaders also support a carbon tax. These include:

  • FedEx CEO Fred Smith;[73]
  • James Owens, CEO of Caterpillar;[74]
  • and Paul Anderson, CEO and Chairman of Duke Energy.[75]

Prasad (2008) wrote about Denmark's carbon tax in the New York Times newspaper.[76] In her view, the Danish carbon tax served as an example of how to reduce emissions in the US.

Carbon taxes compared to cap-and-trade

See also: Cap-and-trade

An alternative government policy to a carbon tax is a cap on greenhouse gas (GHG) emissions. Emission levels of GHGs are capped and permits to pollute are freely allocated (called "grandfathering") or auctioned to polluters. Auctioning permits has significant economic advantages over grandfathering. In particular, auctioning raises revenues that can be used to reduce distortionary taxes and improve overall efficiency.[77] A market may be allowed for these emission permits so that polluters can trade some or all of their permits with others (cap-and-trade). A hybrid instrument of a cap and carbon tax can be made by creating a price-floor and price-ceiling for emission permits.[11] A carbon tax can also be implemented concurrently with a cap.[21]

Unlike a cap system with grandfathered permits, a carbon tax raise revenues. If the revenues are used to reduce other distortionary taxes, this can improve the efficiency of the tax. On the other hand, a cap with grandfathered permits can have an efficiency advantage of being applied to all industries. This provides an equal incentive at the margin for all polluters to reduce their emissions. This is an advantage over a tax that exempts or has reduced rates for certain sectors.[77]

Views

Both cap-and-trade and carbon taxes give polluters a financial incentive to reduce their GHG emissions. Carbon taxes provide price certainty on emissions, while a cap provides quantity certainty on emissions. A large body of the economics literature states that because of the uncertainty over the costs of reducing carbon emissions, carbon taxes should be preferred over carbon trading.[78] In a literature assessment, Fisher et al.. (1996:430) concluded that the choice between an international quota (cap) system, or an international carbon tax, remained ambiguous.[24]

Supporters of taxes over caps

Difficulties with taxes

According to the Carbon Trust (2009), a carbon tax suffers from combining a set price for carbon along with a transfer of revenue from industry to government.[78] This, it is argued, guarantees that the tax will not be set at the appropriate level, but will instead be determined by the politics of large-scale revenue transfers. With a cap, however, the revenues from emission allowances can be separately negotiated with industry.

Another difficulty with taxes are whether the emissions reductions they bring about actually exist - that is, the "additionality" of emissions reductions (Carbon Trust, 2009). Additionality requires a comparison of observed emission reductions against an estimate of the emission reductions that would have taken place without the presence of the tax (the emissions "baseline"). The additionality of a carbon tax is difficult to establish due to effect that other policies have on emissions, e.g., subsidies and regulations. It would, for example, be possible for a government to introduce a carbon tax and then offset the impact of this by making other changes in tax structures.

Distributional impacts

In most instances, firms pass the costs of a carbon price onto consumers. Studies typically find that poor consumers spend a greater proportion of their income on energy-intensive goods and fuel. Therefore cost increases in energy tend to impact the poor worse than the rich.[88]

Studies by Metcalf et al. (2008) and Metcalf (2009) consider the possible distributional impacts of carbon taxes in the United States.[89] The 2008 study considers three recent tax bills introduced to the US Congress. The taxes themselves are highly regressive, but when revenues from the tax are returned lump-sum, the taxes become progressive. The 2009 study looks at a carbon tax combined with a reduction in payroll taxes. It is found that this combination can be distributionally neutral. With an adjustment in Social Security payments for the lowest-income households, the carbon tax policy can be made progressive.

A study by Ekins and Dresner (2004) considers the distributional impact in the UK of introducing a carbon tax and increasing fuel duty.[90] It is found that a carbon tax can be made progressive, but that the tax would make those currently worst affected by fuel poverty more badly off. Of the policy options looked at for transport, the most effective in compensating low-income motorists is found to be an increase in fuel duties and the abolishment of vehicle excise duty.

Irish criticism

In Ireland it was speculated that a carbon tax would be introduced in the Government's supplementary April 2009 budget. This is a matter of concern for rural dwellers, who make up about one third of the Irish population.[91] The NGO Irish Rural Link [1] has noted that according to the Irish Economic and Social Research Institute (ESRI) “a carbon tax would weigh more heavily on rural households”.[92] Irish Rural Link claim that experience from other countries has shown that carbon taxation will only succeed if it is part of a comprehensive package of measures, which includes reducing some other taxes which does not appear to be the Government's approach.[93] IRL claim that in the rush to introduce revenue raising measures the regressive effects of a carbon tax will not be adequately offset.

42% of Ireland's population live in rural areas. This figure is arrived at using spatial analysis to identify areas with less than 150 persons per square kilometre (the OECD definition of 'rural'.[94]

See also

References

  1. ^ Hoeller, P. and M. Wallin (1991). "OECD Economic Studies No. 17, Autumn 1991. Energy Prices, Taxes and Carbon Dioxide Emissions" (PDF). OECD website. Retrieved 2010-04-23.
  2. ^ US NRC (2001). "Climate Change Science: An Analysis of Some Key Questions". National Academy Press, Washington, D.C., U.S.A. Retrieved 2010-02-11.
  3. ^ Staudt, A.; et al. (2008). "Understanding and Responding to Climate Change" (PDF). U.S. National Academy of Sciences. Retrieved 2009-05-20. {{cite web}}: Explicit use of et al. in: |author= (help)
  4. ^ Letter to U.S. Senators from 18 scientific organizations, by Alan I. Leshner (Executive Director, American Association for the Advancement of Science), Keith Sietter (Executive Director, American Meteorological Society), Douglas N. Arnold (President, Society for Industrial and Applied Mathematics), et al., October 21, 2009
  5. ^ "Climate Change 2007: Synthesis Report", p. 14, IPCC, 2007
  6. ^ "Air and Health - Local authorities, health and environment", p. 10, European Environment Agency, July 2009
  7. ^ Massachusetts v. EPA, 549 U.S. 497 (2007))
  8. ^ "Volcanic Gases and Their Effects", United States Geological Survey, retrieved 10-8-2009
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  10. ^ a b c d Bashmakov, I.; et al. (2001). "Policies, Measures, and Instruments. In: Climate Change 2001: Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz et al. Eds.]". Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A. Retrieved 2009-05-20. {{cite web}}: Explicit use of et al. in: |author= (help)
  11. ^ a b Hepburn, C. (2006). "Regulating by prices, quantities or both: an update and an overview" (PDF). Oxford Review of Economic Policy. 22 (2): 226–247. doi:10.1093/oxrep/grj014. Retrieved August 30, 2009.
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  14. ^ Helm, D. (2008). "Climate-change policy: why has so little been achieved?". Oxford Review of Economic Policy. 24 (2): 211–238. doi:10.1093/oxrep/grn014. Retrieved September 2, 2009.
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  16. ^ The correct conversion factor is the molar mass of carbon dioxide divided by the molar mass of carbon (approx. 44 g per mol divided by 12 g per mol)
  17. ^ Klein, R.J.T.; et al. (2007). "Inter-relationships between adaptation and mitigation. In: Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [M.L. Parry et al. Eds.]". Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A. pp. 745–777. Retrieved 2009-05-20. {{cite web}}: Explicit use of et al. in: |author= (help)
  18. ^ Barker, T.; et al. (2007). "11.7.2 Carbon leakage. In (book chapter): Mitigation from a cross-sectoral perspective. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz et al. Eds.)". Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website. Retrieved 2010-04-05. {{cite web}}: Explicit use of et al. in: |author= (help)
  19. ^ Barker, T.; et al. (2007). "Executive Summary. In (book chapter): Mitigation from a cross-sectoral perspective. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz et al. Eds.)". Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website. Retrieved 2010-04-05. {{cite web}}: Explicit use of et al. in: |author= (help)
  20. ^ IPCC (2007). "Glossary A-D. In (section): Annex I. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz et al. Eds.)". Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A. Retrieved 2010-04-18.
  21. ^ a b Goldemberg, J.; et al. (1996). Introduction: scope of the assessment. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change (J.P. Bruce et al. Eds.) (PDF). This version: Printed by Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. PDF version: IPCC website. doi:10.2277/0521568544. ISBN 9780521568548. {{cite book}}: Explicit use of et al. in: |author= (help)
  22. ^ a b Gupta, S.; et al. (2007). "13.3.3.4.3 Coordination/harmonization of policies. In (book chapter): Policies, instruments, and co-operative arrangements. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz et al. Eds.)". Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website. Retrieved 2010-04-02. {{cite web}}: Explicit use of et al. in: |author= (help)
  23. ^ Gupta, S.; et al. (2007). "13.2.1.2 Taxes and charges. In (book chapter): Policies, instruments, and co-operative arrangements. In (book): Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz et al. Eds.)". Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website. Retrieved 2010-03-18. {{cite web}}: Explicit use of et al. in: |author= (help)
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  43. ^ Décision n° 2009-599 DC du 29 décembre 2009 French Constitutional Council Template:Fr
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  58. ^ Quebec to collect nation's 1st carbon tax
  59. ^ Quebec Government to Implement Carbon Tax
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  63. ^ Go figure -- a carbon tax crafted right here at home
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  81. ^ "The Power in the Carbon Tax", John D. Dingell, Washington Post, page A21, August 2, 2007
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  94. ^ "National Rural Development Conference 2008" (PDF).

Further reading

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