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Carbon Taxation Fankhauser 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). The conservative case for carbon dividends. Washington, DC: Climate Leadership Council.
3. World Bank. (2016). State and trends of carbon pricing 2016. Washington, DC: Author.
4. Goulder, L. H., & Parry, I. W. H. (2008). Instrument choice in environmental policy. Review of Environmental Economics and Policy, 2(2), 152–174.
5. Aldy, J. E., & Stavins, R. N. (2012). The promise and problems of pricing carbon: Theory and experience. The Journal of Environment and Development, 21(2), 152–180.
6. Baranzini, A., & Carattini, S. (2017). Effectiveness, earmarking and labeling: Testing the acceptability of carbon taxes with survey data. Environmental Economics and Policy Studies, 19(1), 197–227.
7. Baumol, W. J., & Oates, W. E. (1971). The use of standards and prices for protection of the environment. The Swedish Journal of Economics, 73(1), 42–54.
8. Mankiw, N. G. (2009). Smart taxes: An open invitation to join the Pigou club. Eastern Economic Journal, 35(1), 14–23.
9. Metcalf, G. E. (2009). Designing a carbon tax to reduce U.S. greenhouse gas emissions. Review of Environmental Economics and Policy, 3(1), 63–83.
10. Weitzman, M. L. (2015). Voting on prices vs. voting on quantities in a World Climate Assembly (NBER Working Paper No. 20925). Boston, MA: National Bureau of Economic Research.
11. Bowen, A., & Fankhauser, S. (2017). Good practice in low-carbon policy. In A. Averchenkova, S. Fankhauser, & M. Nachmany (Eds.), Climate change legislation (pp. 123–140). London, England: Edward Elgar.
12. Dresner, S., Dunne, L., Clinch, P., & Beuermann, C. (2006). Social and political responses to ecological tax reform in Europe: An introduction to the special issue. Energy Policy, 34(8), 895–904.
13. Drews, S., & van den Bergh, J. C. J. M. (2015). What explains public support for climate policies: A review of empirical and experimental studies. Climate Policy, 16(7), 1–20.
14. Oates, W. E., & Portney, P. R. (2003). The political economy of environmental policy. In K.-G. Mäler & J. R. Vincent (Eds.), Handbook of environmental economics (pp. 325–354). Elsevier Science B.V.
15. Hammar, H., Löfgren, A., & Sterner, T. (2004). Political economy obstacles to fuel taxation. The Energy Journal, 25(3), 1–17.
16. van Asselt, H., & Brewer, T. (2010). Addressing competitiveness and leakage concerns in climate policy: An analysis of border adjustment measures in the US and the EU. Energy Policy, 38(1), 42–51.
17. Dechezleprêtre, A., & Sato, M. (2017). The impacts of environmental regulations on competitiveness. Review of Environmental Economics and Policy, 11(2), 183–206.
18. Neuhoff, K., Ancygier, A., Ponssardet, J., Quirion, P., Sartor, O., Sato, M., & Schopp, A. (2015). Modernization and innovation in the materials sector: Lessons from steel and cement. Berlin, Germany: Climate Strategies and DIW Berlin. Retrieved from http://climatestrategies.org/publication/modernization-and-innovation-in-thematerials-
sector-lessons-from-steel-and-cement/
19. Jagers, S. C., & Hammar, H. (2009). Environmental taxation for good and for bad: The efficiency and legitimacy of Sweden's carbon tax. Environmental Politics, 18(2), 218–237.
20. Alberini, A., Scasny, M., & Bigano, A. (2016). Policy vs individual heterogeneity in the benefits of climate change mitigation: Evidence from a stated-preference survey (FEEM Working Paper No. 80.2016). Milan, Italy: FEEM
21. Heres, D. R., Kallbekken, S., & Galarraga, I. (2015). The role of budgetary information in the preference for externality-correcting subsidies over taxes: A lab experiment on public support. Environmental and Resource Economics, 66(1), 1–15.
22. Carattini, S., Baranzini, A., & Lalive, R. (2018). Is taxing waste a waste of time? Evidence from a supreme court decision. Ecological Economics, 148, 131–151.
23. Odeck, J., & Bråthen, S. (2002). Toll financing in Norway: The success, the failures and perspectives for the future. Transport Policy, 9(3), 253–260.
24. Schuitema, G., Steg, L., & Forward, S. (2010). Explaining differences in acceptability before and acceptance after the implementation of a congestion charge in Stockholm. Transportation Research Part A: Policy and Practice, 44(2), 99–109.
25. de Groot, J. I. M., & Schuitema, G. (2012). How to make the unpopular popular? Policy characteristics, social norms and the acceptability of environmental policies. Environmental Science and Policy, 19–20, 100–107.
26. Rosentrater, L. D., Sælensminde, I., Ekström, F., Böhm, G., Bostrom, A., Hanss, D., & O'Connor, R. E. (2012). Efficacy trade-offs in individuals' support for climate change policies. Environment and Behavior, 45(8), 935–970.
27. Steg, L., Dreijerink, L., & Abrahamse, W. (2006). Why are energy policies acceptable and effective? Environment and Behavior, 38(1), 92–111.
28. Baranzini, A., van den Bergh, J. C. J. M., Carattini, S., Howarth, R. B., Padilla, E., & Roca, J. (2017). Carbon pricing in climate policy: Seven reasons, complementary instruments, and political economy considerations. WIREs Climate Change, 8(4), 1–17.
29. Carattini, S., Baranzini, A., Thalmann, P., Varone, P., & Vöhringer, F. (2017). Green taxes in a post-Paris world: Are millions of nays inevitable? Environmental and Resource Economics, 68(1), 97–128.
30. Thalmann, P. (2004). The public acceptance of green taxes: 2 million voters express their opinion. Public Choice, 119, 179–217.
31. Spash, C. L., & Lo, A. Y. (2012). Australia's carbon tax: A sheep in wolf's clothing? The Economic and Labour Relations Review, 23(1), 67–86.
32. Klok, J., Larsen, A., Dahl, A., & Hansen, K. (2006). Ecological tax reform in Denmark: History and social acceptability. Energy Policy, 34(8), 905–916.
33. Hsu, S. L., Walters, J., & Purgas, A. (2008). Pollution tax heuristics: An empirical study of willingness to pay higher gasoline taxes. Energy Policy, 36(9), 3612–3619.
34. Kallbekken, S., & Aasen, M. (2010). The demand for earmarking: Results from a focus group study. Ecological Economics, 69(11), 2183–2190.
35. Kallbekken, S., & Sælen, H. (2011). Public acceptance for environmental taxes: Self-interest, environmental and distributional concerns. Energy Policy, 39(5), 2966–2973.
36. Beuermann, C., & Santarius, T. (2006). Ecological tax reform in Germany: Handling two hot potatoes at the same time. Energy Policy, 34(8), 917–929.
37. Dietz, T., Dan, A., & Shwom, R. (2007). Support for climate change policy: Social psychological and social structural influences. Rural Sociology, 72(2), 185–214. Doda, B. (2016). How to price carbon in good times ... and bad! WIREs Climate Change, 7(1), 135–144.
38. Hammar, H., & Jagers, S. C. (2006). Can trust in politicians explain individuals' support for climate policy? The case of CO2 tax. Climate Policy, 5(6), 613–625.
39. Andersson, J. (2015). Cars, carbon taxes and CO2 emissions (Grantham Research Institute on Climate Change and the Environment Working Paper 212/Centre for Climate Change Economics and Policy Working Paper 238). London, England: London School of Economics and Political Science.
40. Baranzini, A., & Carattini, S. (2014). Taxation of emissions of greenhouse gases: The environmental impacts of carbon taxes. In B. Freedman (Ed.), Global environmental change (pp. 543–560). Heidelberg, Germany and New York, NY: Springer.
41. Martin, R., de Preux, L. B., & Wagner, U. J. (2014). The impact of a carbon tax on manufacturing: Evidence from microdata. Journal of Public Economics, 117, 1–14.
42. Gough, I., Abdallah, S., Johnson, V., Ryan Collins, J., & Smith, C. (2012). The distribution of total greenhouse gas emissions by households in the UK, and some implications for social policy. London, England: Centre for Analysis of Social Exclusion.
43. Speck, S. (1999). Energy and carbon taxes and their distributional implications. Energy Policy, 27(11), 659–667.
44. Sterner, T. (Ed.). (2011). Fuel taxes and the poor: The distributional effects of gasoline taxation and their implications for climate policy. Abingdon, England: Routledge.
45. Kallbekken, S., Kroll, S., & Cherry, T. L. (2011). Do you not like Pigou, or do you not understand him? Tax aversion and revenue recycling in the lab. Journal of Environmental Economics and Management, 62(1), 53–64.


Stefano Carattini, Maria Carvalho & Sam Fankhauser, 2018: “Overcoming public resistance to carbon taxes”. In: Stéphane Hallegatte, Mike Hulme (Eds.), WIREs Climate Change, Vol. 9/5, pages 1-26.

Fankhauser I
Samuel Fankhauser
Stefano Carattini
Maria Carvalho,
Overcoming public resistance to carbon taxes 2018

Carbon Taxation Stavins Stavins I 155
Carbon Taxation/Aldy/Stavins: In principle, the simplest approach to carbon pricing would be through government imposition of a carbon tax (Metcalf, 2007)(1). The government could set a tax in terms of dollars per ton of CO2 emissions (or CO2-equivalent on greenhouse gas emissions) by sources covered by the tax, or—more likely—a tax on the carbon content of the three fossil fuels (coal, petroleum, and natural gas) as they enter the economy. Over time, an efficient carbon tax would increase to reflect the fact that as more greenhouse gas emissions accumulate in the atmosphere, the greater is the incremental damage from one more ton of CO2. Imposing a carbon tax would provide certainty about the marginal cost of compliance, which reduces uncertainty about returns to investment decisions, but would leave uncertain economy-wide emission levels (Weitzman, 1974)(2). The government could apply the carbon tax at a variety of points in the product cycle of fossil fuels, from fossil fuel suppliers based on the carbon content of fuel sales (“upstream” taxation/regulation) to final emitters at the point of energy generation (“downstream” taxation/regulation). A carbon tax would be administratively simple and straightforward to implement in most industrialized countries, since the tax could incorporate existing methods for fuel-supply monitoring and reporting to the regulatory authority. Some developing countries with effective tax systems, including monitoring and enforcement regimes to minimize tax evasion, could also implement carbon taxes in a relatively straightforward manner.
Stavins I 156
The effects of a carbon tax on emission mitigation and the economy will depend in part on the amount and use of the tax revenue. The carbon tax revenue could be put toward a variety of uses (cf. >Carbon Taxation Strategies/Fankhauser). VsCarbon Taxation: The implementation of a carbon tax (or any other meaningful climate policy instrument) will increase the cost of consuming energy and could adversely affect the competitiveness of energy-intensive industries. This competitiveness effect can result in negative economic and environmental outcomes: firms may relocate facilities to countries without meaningful climate change policies, thereby increasing emissions in these new locations and offsetting some of the environmental benefits of the policy. Additional emission leakage may occur through international energy markets—as countries with climate policies reduce their consumption of fossil fuels and drive down fuel prices, those countries without emission mitigation policies increase their fuel consumption in response to the lower prices. Since leakage undermines the environmental effectiveness of any unilateral effort to mitigate emissions, international cooperation and coordination becomes all the more important. >Carbon Taxation/Geroe, >Carbon Taxation/Fankhauser, >Carbon Pricing/Stavins.
Cf.
>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. Metcalf, G. E. (2007). A proposal for a U.S. carbon tax swap (The Hamilton Project Discussion Paper 2007-12). Washington, DC: Brookings Institution.
2. Weitzman, M. L. (1974). Prices vs. quantities. The Review of Economic Studies, 41(4), 477–491.


Robert N. Stavins & Joseph E. Aldy, 2012: “The Promise and Problems of Pricing Carbon: Theory and
Experience”. In: Journal of Environment & Development, Vol. 21/2, pp. 152–180.

Stavins I
Robert N. Stavins
Joseph E. Aldy
The Promise and Problems of Pricing Carbon: Theory and Experience 2012



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