Carbon Taxes: Reviewing Theoretical Bases and Evidence

Abstract

Climate change is widely recognised as a global concern requiring a multilateral solution not merely an individual national response. Greenhouse gases including carbon dioxide emissions are recognised as a cause of climate change. Carbon taxes are a form of ‘emissions pricing’ aimed at reducing carbon emissions and are just one form among a number of measures that have been devised for tackling climate change. The use of carbon taxes is somewhat controversial for a number of reasons: in economic theory, taxes are shown to distort markets with a deadweight loss for an economy even following redistributive recycling of tax revenues; carbon taxes can encounter problems of ‘carbon leakage’ resulting from the shift of carbon-intensive industries to low-tax economies, that undermines efforts to achieve global emissions reductions; and, there is evidence that carbon taxes are regressive and expose individuals to economic harm especially those in lower income groups. More optimistic theorists point to opportunities to exploit and develop low-carbon technologies that may foster economic growth yet such potentially positive outcomes may also follow emission-reducing measures other than carbon taxes. The empirical studies that analyse the effectiveness of carbon taxes are far from unanimous but the overall conclusion seems to be that any effects are relatively marginal and must be viewed along with negative non-climate effects. This review of the research has highlighted a number of critical themes on the basis of which recommendations are made for further research. Firstly, further research could be undertaken throughout the world to analyse the effectiveness of carbon taxes when compared to other forms of emissions pricing. Secondly, further studies could be performed to assess the problems of carbon leakage; thirdly, it would be useful to consider the impact of carbon taxes on international competitiveness of different jurisdictions; fourthly, further analysis could be beneficial on the matter of energy supply security including the use of carbon taxes to change behaviour such as reducing the domestic demand for imported oil and gas; and fifthly, further research studies could be usefully undertaken to consider the fairness and public acceptability of carbon taxes.

Keywords: carbon taxes, carbon pricing, emissions trading schemes, carbon leakage

JEL Classification: P43, O38, Q54