How feasible is a unilateral global carbon tax?
Negotiations over climate agreements have highlighted the fact that different parts of the world are expected to be affected very differently by global warming, as well as by the proposed measures to mitigate it. How feasible therefore is the implementation of a unilateral carbon tax? This is the question that Krusell and Smith are analyzing in this paper.
They use a neoclassical growth model augmented with carbon-cycle and climate blocks but, also include rich regional heterogeneity both in economic and climate outcomes. At the global level, the model nests standard one-region economy-climate models, such as the canonical DICE (Dynamic Integrated Climate Economy) model. At the regional level, by contrast, it features realistic spatial variation in climate and economic activity. The model therefore permits the quantitative evaluation of how climate change and policies designed to combat it affect different regions in the world in different ways. They conclude:
Arguably, the most important of our findings is the extreme extent to which the effects of climate change, and hence the effects of mitigation policy such as carbon taxes, differ around the world: these changes dwarf any global average estimates reported in this literature. Hence, large disagreements are to be expected as to how to deal with climate change. Of course, the world’s citizens are not all selfishly thinking only about their own local welfare, but the disparities are so large that any serious policy evaluation ought to give them center stage.
Climate Change Around the World
Authors: Per Krusell, Anthony A. Smith Jr.
From: Stockholm University, Yale University
Hidden benefits of a unilateral carbon tax
A global adherence to unilateral carbon taxes is rather impossible to achieve as the Krussel and Smith paper shows above. It would then seem that unilateral carbon taxes are costly due to the implied short-term distortion, and ineffective in the long run to combat climate change due to the implied leakage.
In this paper, Conte et al. argue that the above reasoning is misleading and incomplete because the spatial response to a unilateral carbon tax can actually lead to a local expansion of the region introducing the tax and to global welfare gains. The authors use a multisector dynamic spatial integrated assessment model, to analyze the effect of a unilateral carbon tax introduced by the European Union (EU) and rebated locally. Their results hinge on two important hypotheses:
- The uniform carbon tax does not exceed 40 US$/tCO2
- The revenue of a carbon tax is locally rebated
They find:
With local rebating, we find that such a carbon tax would expand the size of the European Union economy and improve global welfare. Local rebating of the tax acts as a place-based policy that subsidizes the EU’s non-agricultural core, and as a migration policy that incentivizes people to move to Europe. With a greater share of the world population residing in the developed world, global efficiency and global welfare improve.
On the Geographic Implications of Carbon Taxes
Authors: Bruno Conte, Klaus Desmet, Esteban Rossi-Hansberg
From: Università di Bologna, SMU, University of Chicago
