National Debate on Carbon Pricing

Transcription

1 Natinal Debate n Carbn Pricing Wrkshp #1 Transversal Issues Friday, May 5, 2017 Jhan Eyckmans KU Leuven Faculty f Ecnmics & Business

2 Outline Why shuld we limit carbn emissins? Why carbn pricing as a plicy instrument? Cmplicatins with carbn pricing (and pssible slutins) Taxes (stick) versus subsidies (carrt) Carbn tax at what level? Carbn taxes are regressive Unstable surce f gvernment revenue? Carbn tax part f bigger plicy package Cnclusin and practical prpsal

3 Why shuld we limit carbn emissins?

4 Emissins GHG s = external effect Externality: actins f ecnmic agent have impact n actins f ther agents (withut cmpensating via market) External csts f burning fssil fuels are nt always fully reflected in market prices. Market price < marginal scial cst Resulting in market failure (scial welfare lss) T much pllutin T lw price, and hence t much use, f gds that require plluting input Classical slutins: Emissin standards Internalizing externality in prices via emissin tax (A. Pigu 1930ies) r tradable permits.

5 Negative external effect: graphically 0 p p * p c MC scial MC scial = MC private + MC external Example: MC external Electricity market and externality f fssil fuel technlgies Transprt Agriculture (livestck) MC private (supply) MWTP (demand) Q* 0 Q Q

6 Why carbn pricing as a plicy instrument?

7 Matter f efficiency Hw t distribute reductin effrts? Reductin csts & ptins differ widely amng sectrs, technlgies, cuntries, Static cst efficiency: Intuitively: thse that can reduce emissins at lwer cst shuld bear relatively mre f the effrt Differentiate reductin effrts instead f equal suffering The cheaper yu can reach a target, the mre ambitius yu can be Dynamic cst efficiency: Cntinuus incentive t imprve cmpared t static standards Incentive t invest in R&D

8 Brad cnsensus amng academics Price instruments incentivize efficient allcatin effrt Cst minimizing firms use unique price/tax as cut ff in abatement investment decisins Lw infrmatin cst fr regulatr Many ecnmists advcate carbn pricing, left and right! Run up t COP Paris 2015 petitins Petitin Tuluse Schl Ecnmics: Tirle*, Editrials by Krugman*, Stiglitz*, Weitzman, Nrdhaus, Mankiw, Feldstein and thers(2017) Metcalf and ther (2008)

9 And in financial / ecnmic press

10 Even amng il and steel businesses

11

12 Cmplicatins with carbn pricing (and pssible slutins)

13 Taxes versus subsidies Relative prices f technlgies matter carbn free versus carbn intensive Why nt use carrt (subsidies) instead f stick (tax)? Subsidizing renewables, electric vehicles, But taxes and subsidies are NOT equivalent: Subsidies implicitly stimulate underlying plluting activity (electric vehicles and mbility, renewable energy and energy efficiency, ) Public finance: taxes yield revenue, subsidies drain public funds (subsidies are paid frm gvernment budget that has been raised by distrtinary, i.e. labur taxes) Plitical feasibility and visibility matters f curse

14 A carbn tax at what level? Pigu: tax shuld equal t marginal external cst Scial Cst f Carbn (SCC): discunted sum f all future damages in all cuntries f the wrld f emitting ne tn f GHG tday taking int accunt uncertainty Very challenging t determine, wide range f estimates: EPA: between 11 & 212$/tn CO 2 & central estimate 39$/tn CO 2 Current market price f CO 2 in EU ETS market? Between 4 and 6 /tn CO 2 last year Implicit tax linked t a cnstraint n emissins? Any emissin target level implies an implicit price f carbn Be pragmatic: Start at the lw side and gradually increase ver time Clse t ETS price aspiratins fr cst efficiency

15 EPA and the scial cst f carbn Highly cntrversial issue in US currently. Ggling EPA scial cst carbn yields: See als

16 Carbn tax is regressive Carbn taxes are regressive Directly: budget share f energy prducts is ften higher fr prer than fr richer husehlds Indirectly: higher csts f gds that are carbn intensive t prduce (cst pass thrugh) But all ther carbn plicies are regressive as well Stricter insulatin standards drive up cst f renting/building

17 Carbn tax is regressive Different cmpensatin schemes are pssible but all face an equity versus efficiency trade ff Ex ante: tax exemptin: prest husehlds d nt pay carbn levy (difficult t manage, stigma, ) Ex pst cmpensatin: Use part f carbn tax revenue t finance transfer r tax rebate (see Metcalf s and Mankiw s prpsals fr US) Use ther part t stimulate ecnmy (labur tax cut, duble dividend) Crucial is nt t dilute the incentive effect t much Preferably lump sum, i.e. nt linked t emissin behaviur Hence, n gasline r gas il cheques!

18 Carbn tax is unreliable surce f gvernment funding Public finance reasn t tax gds & services: Tax gds with lwer elasticity f demand relatively strnger in rder t minimize welfare cst f taxatin (F. Ramsey) Many ther externalities t tackle than climate change Rad cngestin, lcal air pllutin, nise, Different reasns t tax shuld be cumulated Indeed, if tax really starts t change behaviur, tax base is erded and might eventually evaprate Same critique applies als t labur taxes t sme extend And it will take several decades befre revenues fall t zer Effect is mitigated by increasing tax rate ver time

19 Carbn tax part f bigger plicy package Need fr lng term green tax shift: Tax bads, nt gds Remve implicit subsidies n carbn intensive gds/technlgies, tax exemptins, Lng standing OECD recmmendatin fr Belgium See inventry in backgrund dcument f Federal Services Cmpany cars, fuels in agriculture and transprt sectr, heating fuels, Incentives shuld be realligned: Example: huse wner and renter face little incentive t imprve energy efficiency f huse New business mdels based n services might help Energy service cmpanies (ESCO s) Carbn taxes reinfrces ther climate plicies Returns f energy efficiency investment imprves

20 Cnclusin and practical prpsal Big cnsensus amng academic ecnmists: carbn pricing preferred ver ther regulatry instruments Practical prpsal: Start with lw rate (40 /tn CO 2 ) and build up (70 /tn CO 2 ) Lng term cmmitment and time cnsistency crucial! Remve exemptins and hidden carbn subsidies Carbn tax n tp f many ther gd reasns t tax fssil fuels Use x% f carbn tax revenues t sften regressive impact Give ex pst tax rebate f y /year t lwest incme husehlds Use (1-x)% f revenues t lwer labur taxatin Aiming fr duble dividend Crdinate tax plicy n EU level fr sectrs facing strng internatinal cmpetitin Other market failure need t be tackled infrmatin asymmetries,

21 Sme references Grainger, C.A. & Klstad, C.D. (2010), Wh pays a price n carbn? Envirnmental & Resurce Ecnmics 46(3), Metcalf, G.E. (2009), Designing a carbn tax t reduce U.S. greenhuse gas emissins, Review f Envirnmental Ecnmics & Plicy 3(1), Metcalf, G.E. (2017), Implementing a Carbn Tax, Resurces fr the Future RFF Reprt, Washingtn Federaal Planbureau OECD: