Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account

52 Pages Posted: 28 Apr 2015

See all articles by Max Franks

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Kai Lessmann

Potsdam Institute of Climate Impact Research

Date Written: March 9, 2015

Abstract

Fiscal considerations may shift governmental priorities away from environmental concerns: Finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter’s ability to counteract carbon policies. Further, no green paradox occurs – instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.

Keywords: Carbon pricing, Green paradox, Infrastructure, Optimal taxation, Strategic instrument choice, Supply-side dynamics, Tax competition

JEL Classification: F21, H21, H30, H73, Q38

Suggested Citation

Franks, Max and Edenhofer, Ottmar and Lessmann, Kai, Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account (March 9, 2015). Available at SSRN: https://ssrn.com/abstract=2599482 or http://dx.doi.org/10.2139/ssrn.2599482

Max Franks (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

Kai Lessmann

Potsdam Institute of Climate Impact Research ( email )

HOME PAGE: http://https://pik-potsdam.de/members/lessmann

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