Can a carbon tax be effectively implemented?
Richard Rosen in this commentary argues that carbon taxes are a good idea but we still need to flesh-out how such policy will be implemented. In particular, he draws attention to the following issues:
- A uniform global carbon tax is that the same tax level (e.g. $100 per ton of CO2) would have a very different macroeconomic impact in a rich country versus a poor country. The issue then is to what extent can poor countries seriously consider implementing a carbon tax anywhere near the higher level of a carbon tax that might be established in rich countries.
- It takes a fairly big rise in fuel prices, which seems fairly permanent, to convince consumers to purchase more energy-efficient equipment, or to switch fuels to a cheaper one, which also typically requires a capital investment. This short-run price elasticity corresponding to just using a little less fuel is just the first stage in modeling increasing carbon price impacts but economists often do not explicitly distinguish this first phase of a response from the second stage response.
- It’s important to discuss specifically which other mitigation policies should be implemented to complement carbon taxes, and by when, so that total carbon emissions could plausibly be reduced to zero in a reasonable time frame.
Carbon Taxes: A Good Idea But Can They Be Effective?
By: Richard A. Rosen – Institute for New Economic Thinking
Optimal design of carbon prices
Robert Ritz, in this paper, develops a model with a social planner who chooses countries’ carbon prices so as to maximize global welfare. There are three insights:
- Because of market-power distortions, the planner’s optimal policy is second-best. As a result, second-best carbon prices can be highly asymmetric across countries. The intuition behind this finding is that market power pushes countries’ optimal carbon prices downwards as the planner seeks to cushion the increase in consumer prices.
- The presence of international trade introduces a further effect: if carbon leakage for the country with relatively clean firms is sufficiently pronounced, its optimal carbon price is zero. This, in turn, limits deadweight losses in the product market and enables the planner to choose a higher carbon price for the dirtier country, one which may lie above the social cost of carbon.
The more general point is that, while carbon prices around the world today are almost certainly far too low, failing to implement a uniform global carbon price does not necessarily imply the wrong response to climate change. Moreover, competition policy to mitigate market power may also enable stronger and more balanced climate action.
Global carbon price asymmetry
Author: Robert A. Ritz
From: University of Cambridge
