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%
140-284
500-1000%
5.85
7.75
10-11
3.85
8.53-9.49
75%
99%
125-137%
48%
106-118%
Coal ($ per ton)
Electricity (cents per kWh)
Old Generators
Gas
Petroleum
Coal
New CCGT
Coal Gasification
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
What’s left
for the South?
90% by 2050
in the North
What kind of climate regime can make this possible?
An Alternative Conception
Emissions and Income
Carbon Emissions/Capita (tons)
14.00
Qatar
12.00
10.00
United Arab
Emirates
8.00
Luxembourg
Bahrain
6.00
Singapore
United States
Australia
4.00
Norway
Canada
Saudi Arabia
Czech Republic
Japan
2.00
Switzerland
Hong Kong, China
0.00
0
5,000
10,000
15,000
20,000
GDP/Capita (PPP$)
Source: World Bank (1998); Marland, et al. (1998).
25,000
30,000
35,000
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
Energy Consumption per capita
2000
2005
2030
OECD
~5.1
~5.6
~6.9
EIT
~1.0
~1.1
~1.8
Developing
Countries
~3.6
4.7
~9
World
~9.7
11.4
17.7
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