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Border carbon adjustments imply that high-income countries set taxes on energy-intensive imports that are proportional to the carbon content of these imports, to match their own carbon taxes. This paper considers the impacts of such a policy on exporter countries, many of which have no or very low carbon taxes today. The paper first studies a policy whereby the importer allows the exporter’s border tax to be reduced by its own comprehensive carbon tax (“tax rebating”). The analysis finds that the exporter is then incentivized to set its own comprehensive carbon tax at the same rate as the border tax, up to a maximal rate. When the border tax is higher, the exporter instead reduces its carbon tax. Border tax revenues of the high-income country can be returned to incentivize higher carbon taxes in the exporting countries (“carbon crediting”). When tax rebating is not allowed but tax revenues are fully returned, even higher exporter carbon taxes can then be incentivized, possibly exceeding $60 per ton of carbon dioxide in the numerical examples. Border taxation can give rise to export diversion away from border tax-setting countries, which reduces the scope for incentivizing the exporter’s carbon tax. The paper also studies how taxes on oil extraction by oil exporters can be incentivized by oil importing countries, by increasing their oil import prices above world market rates, or more efficiently through support to investments in exporters’ renewable energy capacity.

Developing countries are increasingly giving attention to carbon pricing to reduce their emissions, particularly in meeting their nationally determined contribution under the Paris Climate Agreement. However, they would like to understand the potential economic, distributional, and environmental impacts of carbon pricing policies before they consider implementation. Using a computable general equilibrium model of Ethiopia, this study examines the effects of a hypothetical carbon tax (US$20/total carbon dioxide) under several alternative schemes to recycle carbon tax revenue to the economy. The study finds that a carbon tax would be regressive in all schemes considered except those when the tax revenue is recycled, as a cash transfer, to household income groups either equally or inversely proportional to their incomes. The schemes that make the carbon tax progressive also cause a higher reduction of carbon dioxide emissions, thereby ensuring the alignment of equity and environmental outcomes of the carbon tax. However, these schemes are not necessarily economically efficient because they cause higher reductions of gross domestic product compared to other options considered.

The postponement of 2012 VAT Law implementation means that the higher tax revenues expected from the measure will be delayed, and additional sources of revenue need to be considered. Model simulations suggest that implementation of the VAT Law starting July 1, 2017 at the originally proposed rate of 15 percent would have yielded additional tax revenue of about 1 percent of GDP in FY2018, and 0.8 percent of GDP in FY2019. Several measures could be considered to make up this short-fall. Automation and process simplification could bring additional tax revenues ranging from 0.3 to 0.7 percent of GDP in FY2018. There is substantial scope for efficiency gains in shifting from a type-of-tax towards a function-based tax administration, facilitating compliance. Carbon taxes could generate resources equivalent to 1 percent of GDP, and tobacco taxes could raise a further 1 to 2 percent of GDP. Rationalizing tax incentives and exemptions can also generate more revenue. The proposed administrative measures, including expanding tax withholding mechanisms, would not require legislative changes and could be implemented in the short term, boosting revenue during the current fiscal year (FY2018). The other tax policy measures could be considered for implementation in the medium term and would require corresponding legislative initiatives.

This report examines how to design effective carbon pricing mechanisms (CPMs) for the construction industry. As the world’s largest consumer of raw materials, it accounts for a significant proportion of final energy demand and is responsible for 25 percent to 40 percent of global carbon-related emissions. Demographic trends underline the need for the construction industry to do more to address its contribution to climate change. The world’s population is predicted to reach nearly 10 billion by 2050, with the majority expected to live in urban areas. This will increase demand for buildings and infrastructure; some estimates suggest that 75 percent of the infrastructure needed by 2050 must still be built.

This paper reviews the main transmission channels of an environmental tax reform shifting the tax burden from labor to carbon emission. The analysis uses a simple open-economy macro model and estimates dynamic environmental tax as well as personal income tax multiplier effects on output and employment for a panel of 75 high- and low-income countries from 1994 to 2018. Tax policy changes are identified by cyclically adjusting the tax revenues. The estimated environmental tax multiplier effects on output range from 1 on impact to 1.8 at the peak. Personal income tax multipliers are slightly higher, ranging from 1.4 to 2.3. While income taxes reduce employment, environmental taxes do not. Environmental tax multipliers are highly regime dependent: they are close to zero or statistically insignificant unless taxes are increased when output contracts, fuel prices are high, the environmental tax levels are high, or the carbon intensity of output is low. Commodity trade-exposed countries face higher tax multipliers. This analysis concludes that, compared with income taxes, environmental taxes can be a less contractionary source of revenues to support the post-COVID-19 fiscal consolidation efforts, especially in countries that are at the beginning of their decarbonization efforts.

Carbon leakage is much discussed in carbon pricing policy. Stakeholders, especially emissions-intensive industries, have expressed concern about the implications of carbon pricing when they compete with firms located in jurisdictions without equivalent policies. This technical note provides an overview of the issue of carbon leakage, discussing the theory, evidence and policy design. This issue is of interest to a range of PMR countries and is of great importance to successful design and implementation of carbon pricing policies. The technical note addresses three broad questions: – How to evaluate the expected competitiveness and carbon leakage impacts (negative and positive) due to carbon pricing policies for different sectors and the entire economy? – How to mitigate the risk of negative impacts and strengthen the positive impacts (through instrument design or complementary policies) in the short and long term, and for different levels of expected decarbonization? – How to manage the process of dialogue between a government, business and civil society on the implications for competitiveness and risks of carbon leakage, and their mitigation? It draws lessons from policymaking experience and academic evidence to provide guidance to countries on how to address issues of carbon leakage as they arise in their national contexts.

This note specifically focuses on explaining the impact of the application of the EU’s Carbon Border Adjustment Mechanism (CBAM) on the economy of the Republic of North Macedonia as requested by the authorities in March 2024. It builds on the detailed work delivered under the North Macedonia Climate Public Finance Review that simulates the results of the carbon tax introduction.

This paper analyzes the effects of carbon taxation and border carbon adjustments in a setting where firms can choose to respond to taxation by abating or by outsourcing part of their production. For this, this paper sets up a general equilibrium trade model, calibrated with world trade and input-output data that features a discrete choice production structure, where the producers choose between outsourcing or abating emission-intensive intermediate production steps. The paper finds that border adjustments that cannot target scope 3 emissions can lead to outsourcing, and thus leakage, further down the value chain, but nevertheless induce higher abatement both in the countries that impose the border adjustment and in the ones affected by it.

Carbon markets could be a game changer in advancing climate action. But they have to be trustworthy, transparent, result in real climate mitigation and bring tangible benefits, especially for developing countries, if they are to make a real difference. Like any effective market, incentives need to be well-aligned, both buyers and sellers need confidence in the quality of the product and the price it will get, and that the transactions themselves are sound and sustainable. The World Bank Group (the Bank) has been supporting countries by providing technical assistance and financing to enable countries to generate, and now to sell, high integrity carbon credits in the forests and other sectors, and bring benefits to people and communities. Through this support countries have generated unimpeachable credits - namely, of high quality and high integrity and developed country systems to share benefits and fairly compensate people and communities. High-integrity carbon markets can be a win-win for people and the planet, potentially generating millions, if not billions, for countries on the pathway to low carbon development. While there are challenges, the potential of carbon markets needs to be tapped and fully utilized.

This paper studies the conditions under which debt securities that make the cost of debt contingent on the issuer's carbon emissions, similar to sustainability-linked loans and bonds, can be equivalent to a carbon tax. The paper proposes a model in which standard and environmentally-oriented agents can adopt polluting and nonpolluting technologies, with the latter being less profitable than the former. A carbon tax can correct the laissez-faire economy in which the polluting technology is adopted by standard agents, but requires sufficient political support. Carbon-contingent securities provide an alternative price incentive for standard agents to adopt the nonpolluting technology, but require sufficient funds to fully substitute the regulatory tool. Absent political support for the tax, carbon-contingent securities can only improve welfare, but the same is not true when some support for a carbon tax exists. Understanding the conditions under which the regulatory and capital market tools are substitutes or complements within one economy is an important steppingstone in thinking about carbon pricing globally. It sheds light, for instance, on how developed economies can deploy finance to curb carbon emissions in developing economies where support for a carbon tax does not exist.