Carbon Taxes, Climate Change, and Sustainable Development

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Carbon Taxes, Climate Change, and Sustainable
Development

• Tariq Banuri
• Stockholm Environment Institute
• June 2008

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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

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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)

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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

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Impact of 100/tCO2 (367/tC)
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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

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The Development Crises

• Traditional development and MDGs
• Solution conventional financial flows
• The impact of climate change
• Solution Financial and support for adaptation
• Impact of OECD climate policies (e.g., carbon
  tax)
• Solution Policy coherence in North
• Impact of own climate policies (especially
  energy)
• Solution New and additional resources for
  mitigation and adaptation
• The growth conundrum Has the age of growth come
  to an end?

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Stern Stabilization Trajectories
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Emission Trajectories for 450 ppm
80 global reductions by 2050
Whats left for the South?
90 by 2050 in the North
What kind of climate regime can make this
possible?
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An Alternative Conception
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Emissions and Income
Source World Bank (1998) Marland, et al. (1998).
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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.

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Developing Country Energy Deficit
Energy Consumption per capita
Developing Countries
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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

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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