Wednesday, November 27, 2013

Carbon Tax Thresholds

Jack Pezzey and Frank Jotzo have a new short piece in Nature Climate Change on carbon taxes with free emissions thresholds.

Jack Pezzey comments on this piece:

"We're hoping this piece will shift economists' views on a basic assumption about carbon taxation, which we argue is unnecessary, and is stifling the adoption of a tax, with its well-known advantages over carbon (emissions) trading.

The basic, unnecessary assumption is that a carbon tax must be charged on ALL emissions coming from any source that's included in the tax scheme. Our commentary notes that current tax schemes typically do charge for all emissions from included sources, and have low tax rates with key emitters given even lower tax rates or excluded altogether. On the other hand, charging a high tax rate on all emissions would generate implausibly large revenues, at least in the short to medium term. We highlight the academically established, but institutionally ignored alternative of taxing only emissions above fixed thresholds, which are equivalent to free tradable permits in many ways.

We're not arguing that carbon tax thresholds are always a good idea, or that they solve the intractable problem of international cooperation on emissions control, just that a tax with thresholds should always be considered as an option whenever emission pricing is debated (or explained in textbooks). For example, starting a carbon tax at a low rate and with no thresholds may be a good idea. But the trading equivalent of this is full permit auctioning and an unambitious emissions cap, which in the profession is now usually seen as inferior, so why not also consider a higher tax rate with thresholds, the equivalent of the standard trading system seen in practice, with some free permits and (sometimes) a more ambitious cap?

We do not advocate for carbon tax thresholds as a permanent feature. Rather, we see them as transitory measures that facilitate the introduction of carbon taxes, at higher tax rates than might otherwise be possible politically. Carbon tax thresholds could be phased out over time. In the article, we point out the potential benefits from treating carbon taxes as a source of fiscal revenue, and recycling it to achieve greater efficiency in taxation, and to assist low-income households in dealing with energy price increases.

Thresholds also raise contentious issues which complicate taxation; but as we note briefly in the paper, and at length in the Supplementary Information, many of these issues have already been "dealt with" for free tradable permits, that is, resolved, albeit imperfectly, well enough to allow permit trading in practice. So we contend that similar resolutions can be found for tax thresholds, but only if they are first put on the agenda."

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