Samuel Fankhauser on Carbon Taxation - Dictionary of Arguments

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Carbon taxation: A carbon tax is a fee imposed on the burning of fossil fuels based on the amount of carbon dioxide they emit. It aims to reduce greenhouse gas emissions by making polluters pay for the environmental cost, encouraging businesses and individuals to shift toward cleaner energy sources. See also Taxation, Corbon pricing, Emission permits, Emissions trading, Emissions. _____________ Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments.

> Fankhauser, Samuel	> Carbon Taxation	Samuel Fankhauser on Carbon Taxation - Dictionary of Arguments Fankhauser I 1 Carbon Taxation/EU/US/Carattini/Carvalho/Fankhauser: Carbon taxation, in conjunction with other regulatory measures, could be an effective way of closing policy gaps in sectors that are not already covered by a functioning emissions trading system. In the EU, carbon taxes could play a role in reducing Fankhauser I 2 emissions outside the EU ETS [Emissions Trading System], where much of the future policy effort must lie, according to the European Environment Agency (2016)⁽¹⁾. In the United States, senior Republicans have laid out their arguments for a US $40 carbon tax in The Conservative Case for Carbon Dividends (Baker III, Feldstein, Halstead, et al., 2017)⁽²⁾. >Emissions Trading. A carbon tax is a relatively simple instrument to impose on the individual emitters, including the many smaller ones that dominate the non-ETS sectors and are less likely than large emitting facilities or sources to engage in carbon trading. According to the expertise collected by the World Bank, cap-and-trade systems—like the EU ETS—are best suited for industrial actors that have the capacity and skills to engage in the market actively (World Bank, 2016)⁽³⁾. With their high transaction costs, such systems are less appealing for sectors with a large number of small emission sources, such as transportation and buildings (Goulder & Parry, 2008)⁽⁴⁾. Economists advocate the use of carbon taxes because they provide the price incentive to reduce emissions without being technologically prescriptive, are simpler to administer, and do not draw on government budgets (Aldy & Stavins, 2012⁽⁵⁾; Baranzini et al., 2017⁽⁶⁾; Baumol & Oates, 1971⁽⁷⁾; Goulder & Parry, 2008⁽⁴⁾; Mankiw, 2009⁽⁸⁾; Metcalf, 2009⁽⁹⁾; Weitzman, 2015⁽¹⁰⁾). Fankhauser I 4 The required tax level is determined by the environmental objective and more specifically by the marginal costs of meeting a given emissions target (Bowen & Fankhauser, 2017)⁽¹¹⁾. Fankhauser I 2 VsCarbon Taxation/VsCarbon Tax/Objections to Carbon Taxation/Carattini/Carvalho/Fankhauser: Despite these advantages, carbon taxes are one of the least used climate policy instruments. Carbon tax proposals have been undone, sometimes at an advanced political stage, for example in Australia (in 2014), France (in 2000), Switzerland (in 2000 and 2015), and most recently in the United States in Washington State (in 2016). Objections to carbon taxation are often not about the introduction of the tax itself, but about its design (Dresner, Dunne, Clinch, & Beuermann, 2006)⁽¹²⁾ and the way relevant information is shared. Sociopsychological factors—such as perceived coerciveness, equity, and justice—all affect the extent to which voters accept different climate policy instruments (Drews & van den Bergh, 2015)⁽¹³⁾. Factoring them into the design from the outset could make carbon tax legislation easier to pass. Opposition by vested interests has proved to be very effective in limiting public intervention in a wide range of environmental issues (Oates & Portney, 2003)⁽¹⁴⁾, and their lobbying efforts can influence voters' views, preventing the passage, or even revoking the implementation of a carbon tax. Other studies, for instance by Hammar, Löfgren, and Sterner (2004)⁽¹⁵⁾, Van Asselt and Brewer (2010)⁽¹⁶⁾, Dechezleprêtre and Sato (2017)⁽¹⁷⁾, and Neuhoff et al. (2015)⁽¹⁸⁾, provide insights into how vested interests and other political economy aspects have affected the design of carbon pricing in recent times. Fankhauser I 3 Recognizing that there are variations in attitudes and perceptions across individuals, we identify five general reasons for aversion to carbon taxes that have been recurrently emphasized in the literature. 1. VsCarbon Taxation: The personal costs are perceived to be too high. A Swedish survey by Jagers and Hammar (2009)⁽¹⁹⁾ found that people associate carbon taxes with higher personal costs, more than they do with alternative policy instruments. A discrete choice experiment by Alberini, Scasny, and Bigano (2016)⁽²⁰⁾ showed that Italians had a preference, among climate policy instruments, for subsidies over carbon taxes. Participants in a lab experiment by Heres, Kallbekken, and Galarraga (2015)⁽²¹⁾ similarly expected higher payoffs from subsidies than from taxes, especially when there was uncertainty on how tax revenues would be “rebated.” Ex ante, individuals tend to overestimate the cost of an environmental tax, and underestimate its benefits (Carattini et al., 2018⁽²²⁾; Odeck & Bråthen, 2002⁽²³⁾; Schuitema, Steg, & Forward, 2010⁽²⁴⁾). The literature in social psychology also suggests that individuals prefer subsidies because they are perceived as less coercive than taxes. Taxes are “pushed” onto polluters, imposing a mandatory cost, while subsidies are seen as “pull” measures, which supposedly reward climate-friendly behavior (de Groot & Schuitema, 2012⁽²⁵⁾; Rosentrater et al., 2012⁽²⁶⁾; Steg et al., 2006⁽²⁷⁾). 2. VsCarbon Taxation: Carbon taxes can be regressive. [Voters] perceive, rightly, that without counterbalancing measures carbon taxes may have a disproportionate negative impact on low-income households. These counterbalancing measures can, however, offset the adverse distributional effects of carbon taxes, and even make them progressive. Furthermore, it is important to keep in mind that alternative climate policy instruments such as subsidies for renewable energy can also have similar regressive effects and may not generate revenues to counter them (Baranzini et al., 2017)⁽²⁸⁾. 3. VsCarbon Taxation: Carbon taxes could damage the wider economy. This has been illustrated in Switzerland, where, in two different instances more than 10 years apart, concern about the potential competitiveness and employment effects of energy taxes contributed to their rejection in public ballots, even in the context of very limited unemployment (Carattini, Baranzini, Thalmann, Varone, & Vöhringer, 2017⁽²⁹⁾; Thalmann, 2004⁽³⁰⁾). While these concerns are partly justified, voters may tend to overestimate competitiveness and job effects. [This] may also result from specific information campaigns led by energy-intensive companies, as in the case of Australia (cf. Spash & Lo, 2012)⁽³¹⁾. 4. VsCarbon Taxation: Carbon taxes are believed not to discourage high-carbon behavior (…) (Klok, Larsen, Dahl, & Hansen, 2006⁽³²⁾; Steg et al., 2006⁽²⁷⁾). [Individuals] consider low-carbon subsidies to be a more powerful way to reduce greenhouse gas emissions, especially if the cost of switching from consuming high-carbon goods to low-carbon goods is considered high. [They] believe that the price elasticity of demand for carbon-intensive goods is close to zero. The expectation that carbon taxes do not work is one of the main reasons for their rejection by people in surveys and real ballots (Baranzini & Carattini, 2017⁽⁶⁾; Carattini et al., 2017⁽²⁹⁾; Hsu, Walters, & Purgas, 2008⁽³³⁾; Kallbekken & Aasen, 2010⁽³⁴⁾; Kallbekken & Sælen, 2011⁽³⁵⁾). Fankhauser I 4 5. VsCarbon Taxation: Governments may want to tax carbon to increase their revenues. [Individuals] assume—as a direct consequence of concern 4 above—that the purpose of introducing a carbon tax is not to reduce greenhouse gases but to increase government revenues (Klok et al., 2006)⁽³²⁾. Trust issues sometimes concern the specific environmental tax proposal under consideration, but they may also be broader, related to people's general view of tax policy or even to trust in the government itself (Baranzini & Carattini, 2017⁽⁶⁾; Beuermann & Santarius, 2006⁽³⁶⁾; Dietz, Dan, & Shwom, 2007⁽³⁷⁾; Hammar & Jagers, 2006⁽³⁸⁾). VsVs: Some of these perceptions are incorrect. There is evidence that carbon pricing does in fact reduce emissions (J. Andersson, 2015⁽³⁹⁾; Baranzini & Carattini, 2014⁽⁴⁰⁾; Martin, de Preux, & Wagner, 2014⁽⁴¹⁾) and has so far had a minimal impact on the wider economy, in terms of adversely affecting the competitiveness of domestic industry, at least in the presence of adjustments and specific measures tailored to support the most exposed firms (Dechezleprêtre & Sato, 2017)⁽¹⁷⁾. On the other hand, voters are right to suspect that governments would probably welcome the extra revenues. Indeed, its benign fiscal implications are often highlighted as one of the merits of a carbon tax (Bowen & Fankhauser, 2017)⁽¹¹⁾. It is also the case that carbon taxes are often regressive; without counter measures they may affect poor households disproportionately (Gough, Abdallah, Johnson, Ryan Collins, & Smith, 2012⁽⁴²⁾; Metcalf, 2009⁽⁹⁾; Speck, 1999⁽⁴³⁾; Sterner, 2011⁽⁴⁴⁾). (…) the accuracy of public perceptions is less important than the fact that they are widely held and can hinder the adoption of otherwise desirable policies. People's attitudes to carbon taxes appear to be influenced more by the direct personal cost of the measure than by an appreciation of the environmental objective (Kallbekken, Kroll, & Cherry, 2011)⁽⁴⁵⁾. Consequently, the public acceptability of an environmental tax depends heavily on its policy stringency, since the proposed tax rate determines the direct costs to consumers. >Emission permits, >Emission reduction credits, >Emission targets, >Emissions, >Emissions trading, >Climate change, >Climate damage, >Energy policy, >Clean Energy Standards, >Climate data, >Climate history, >Climate justice, >Climate periods, >Climate targets, >Climate impact research, >Carbon price, >Carbon price coordination, >Carbon price strategies, >Carbon tax, >Carbon tax strategies. 1. European Environment Agency (2016). Chapter 1. Overall progress towards the European Union's 20-20-20 climate and energy targets. In Trends and projections in Europe 2016—Tracking progress towards Europe's climate and energy targets (pp. 1–12). Brussels, Belgium: Author. 2. Baker, J. A. III, Feldstein, M., Halstead, T., Mankiw, N. G., Paulson, H. M. Jr., Schultz, G. P., … Walton, R. (2017). 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Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.	Fankhauser I Samuel Fankhauser Stefano Carattini Maria Carvalho, Overcoming public resistance to carbon taxes 2018

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