Carbon Taxes, Climate Change, and Sustainable Development

Tariq Banuri

Stockholm Environment Institute

June 2008

Economics of Climate Policy

• Pigovian (Economists’ choice): carbon tax

• Coasian (Kyoto option) property rights: cap and trade system

• Keynesian, or the Investment option

• Relevant Factors: – Scale/ timing– Policy credibility– Development impact

Other Instruments• Institutional Development

– IRENA (AOSIS proposal 1997)– Feed in Tariff approach

• Investment in Renewables

• Financing through other global taxes– Tobin Tax (Epstein-Gelbspan proposal)– Air travel tax– Progressive global tax (Baer et al)– “Excess” emissions penalty (Brazilian

Proposal for Kyoto)

Pros and Cons of Cabon Tax

• Pro– Internalization of externalities– Revenue generation (but contrary to

ecotaxation conception)– Discouragement of rent seeking

• Con– Uncertainty (how high a tax is needed?)– Equity impact, Development impact– Tinbergen critique (tools and goals)– Dual pricing and institutions

Impact of $100/tCO2

($367/tC)Type Impact Percent Impact

Petroleum ($ per gallon) 1 20-40%

Natural Gas ($ per 000cft) 6 60-150%

Coal ($ per ton) 140-284 500-1000%

Electricity (cents per kWh)

Old GeneratorsGasPetroleumCoal

New CCGTCoal Gasification

5.857.75

10-113.85

8.53-9.49

75%99%

125-137%48%

106-118%

Implications for Development

• Balance of payments: oil imports, impact of global recession on exports

• Fiscal Deficit: Tariff revenue, subsidies to low income households, recession and revenue, welfare spending

• Inflation: Energy prices, exchange rate depreciation, budget deficit

• Growth: Aggregate demand, shift of investment to energy, welfare costs

The Development Crises

1. Traditional development and MDGs– Solution: conventional financial flows

2. The impact of climate change– Solution: Financial and support for adaptation

3. Impact of OECD climate policies (e.g., carbon tax)– Solution: Policy coherence in North

4. Impact of own climate policies (especially energy)– Solution: New and additional resources for mitigation and

adaptation

5. The growth conundrum: Has the age of growth come to an end?

Stern: Stabilization Trajectories

Emission Trajectories for 450 ppm

80% global reductions by 2050

90% by 2050 in the North

What’s left for the South?

What kind of climate regime can make this possible?

An Alternative Conception

Emissions and Income

Qatar

Luxembourg

United States

Singapore

Switzerland

Hong Kong, China

United Arab Emirates

Bahrain

Norway

Saudi ArabiaCzech Republic

Australia

Canada

Japan

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

GDP/Capita (PPP$)

Ca

rbo

n E

mis

sio

ns

/Ca

pit

a (

ton

s)

Source: World Bank (1998); Marland, et al. (1998).

The Role of Energy

• Main difference between rich and poor countries • Strongly correlated with HD indicators• Developing countries need to expand electricity and

transport infrastructure three to four times to reach basic needs goals

• Expansion is constrained not by demand (efficiency, population) but by supply (investment capacity).

• Over 75% emissions from the energy sector• Projected developing country energy growth (3 to

5%) means more emissions despite rising energy efficiency.

Developing Country Energy Deficit

 

 

2000 2005 2030

OECD ~5.1 ~5.6 ~6.9

EIT ~1.0 ~1.1 ~1.8

~3.6 4.7 ~9

World ~9.7 11.4 17.7

Developing Countries

Energy Consumption per capita

Example: Energy Market

• Electricity to low and middle income subsidized (3-6 cents per kWh); also subsidy on natural gas

• Low taxes on petroleum products, especially diesel and kerosene, compensation for global price increases

• Incentives for alternative generation: levelized tariffs across time (20 years) and sources.

• Levelized tariffs for distributors• Significant suppressed demand (brown outs, limited

access)• Rising prices leading to resistance and inflation

Options

• Carbon taxes and cap and trade can lead to higher prices with cascading impacts, and will need compensating policies

• Cap and trade: need investment in institutions to benefit from market opportunities

• Investment option: public supported investment program in renewables, subsidized as needed in line with welfare implications, but will need global financing