• Energy Research
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A stylised analytical framework is used to show how the global carbon tax and the amount of untapped fossil fuel can be calculated from a simple rule given estimates of society's rate of time impatience and intergenerational inequality aversion, the extraction cost technology, the rate of technical progress in renewable energy and the future trend rate of economic growth. The predictions of the simple framework are tested in a calibrated numerical and more complex version of the integrated assessment model (IAM). This IAM makes use of the Oxford carbon cycle of Allen et al. (2009), which differs from DICE, FUND and PAGE in that cumulative emissions are the key driving force of changes in temperature. We highlight the importance of the speed and direction of technological change for the energy transition and how time impatience, intergenerational inequality aversion and expected trend growth affect the time paths of the optimal global carbon tax and the optimal amount of fossil fuel reserves to leave untapped. We also compare these with the adverse global warming trajectories that occur if no policy actions are taken.

A rapidly rising carbon tax leads to faster extraction of fossil fuels and accelerates global warming. We analyze how general equilibrium effects operating through the international capital market affect this Green Paradox. In a two-region, two-period world with identical homothetic preferences and without investment, the global interest rate falls and the Green Paradox weakens. With investment or a relatively more impatient oil-importing region, the Green Paradox may be strengthened because the future oil demand function shifts downward or because the interest rate rises. If the oil-importing region is very much more patient than the oil-exporting region, the Green Paradox may be reversed but in our calibrated model the effects are tiny. With exploration and endogenous initial oil reserves, a future carbon tax lowers cumulative oil extraction in partial equilibrium. If the boost to current oil extraction is weakened, strengthened or reversed in general equilibrium, so is the fall in cumulative extraction. A partial and general equilibrium welfare analysis of a future carbon tax, both for full and partial exhaustion, is given. The effects of stock-dependent extraction costs are separately discussed in an Appendix.

Emissions regulations like carbon pricing raise the price of covered sector goods and thus can interact with and exacerbate other preexisting distortions in the economy. One such distortion is labor taxes. Another is emissions "leakage" due to the lack of comparable emissions pricing abroad or among other emitting sectors at home. A potential response is to combine the emissions tax with a rebate to production to mitigate the price increases. We use an optimal tax framework to solve for the optimal emissions tax and output rebate, given these distortions. We then employ a multisector computable general equilibrium model based on the GTAP framework to simulate the effects of a $50 per-ton carbon tax on the major emissions-intensive sectors in the U.S. economy and estimate optimal rebates by sector.

Current economic instruments aimed at climate change mitigation focus mainly on CO(2) emissions, but efficient climate mitigation needs to focus on other greenhouse gases as well as CO(2). This study investigates the distributional effects of climate change taxes on households belonging to different income and lifestyle groups; and it compares the effects of a CO(2) tax with a multiple GHG tax in the UK in terms of cost efficiency and distributional effects. Results show that a multi GHG tax is more efficient than a CO(2) tax due to lower marginal abatement costs, and that both taxes are regressive, with lower income households paying a relatively larger share of their income for the taxes than higher income households. A shift from a CO(2) tax to a GHG tax will reduce and shift the tax burden between consumption categories such as from energy-intensive products to food products. Consumers have different abilities to respond to the tax and change their behavior due to their own socio-economic attributes as well as the physical environment such as the age of the housing stock, location, and the availability of infrastructure. The housing-related carbon emissions are the largest component of the CO(2) tax payments for low income groups and arguments could be made for compensation of income losses and reduction of fuel poverty through further government intervention.

The idea of a global carbon price has been a recurrent theme in debates on international climate policy. Discarded at the Conference of Parties (COP) of Copenhagen in 2009, it remained part of deliberations for a climate agreement in subsequent years. Unfortunately, there is still much misunderstanding about the reasons for implementing a global carbon price. As a result, ideological and political resistance against it prospers. Here we present the main arguments in favor of a carbon price to stimulate a fair and well-informed discussion about climate policy instruments. This includes arguments that have received surprisingly little attention so far. It is stressed that a main reason to use carbon pricing is environmental effectiveness, so not only economic efficiency (including the special case of cost-effectiveness). In addition, we provide ideas on how to implement a uniform global carbon price, whether using a carbon tax or emissions trading.

This paper analyses the medium-term effects of a carbon tax on growth and CO2 emissions in Ireland, a small open economy. We find that a double dividend exists if the carbon tax revenue is recycled through reduced income taxes. If the revenue is recycled by giving a lump-sum transfer to households, a double dividend is unlikely. We also determine that a greater incidence of the carbon tax falls on capital than on labour. When combined with a decrease in income tax, there is a clear shift of the tax burden from labour to capital. Finally, most of the effect on the economy is due to changes in the competitiveness of the manufacturing and market services sectors.

Climate policymaking faces twin challenges of carbon leakage and public sector revenue requirements. A large literature advocates the use of CO2 pricing and recycling the revenues to lower distorting taxes as a way to minimize costs. In this paper, we explore the implications of labor tax interactions for cost-effectiveness of border adjustments and other measures to cope with leakage. We find that, for plausible values of labor supply elasticities, the cost savings from revenue recycling are significant-from 15 to 25%. The cost savings from anti-leakage measures are generally smaller, but also significant, particularly for small coalitions or more binding reduction targets. Tax interactions further enhance the cost savings from border adjustments, but make other measures like rebates or exemptions less attractive.