Carbon Taxes, Climate Change, and Sustainable Development

1. Carbon Taxes, Climate Change, and Sustainable Development Tariq Banuri Stockholm Environment Institute June 2008

2. Economics of Climate Policy • Pigovian (Economists’ choice): carbon tax • Coasian (Kyoto option) property rights: cap and trade system • Keynesian, or the Investment option • Relevant Factors: • Scale/ timing • Policy credibility • Development impact

3. Other Instruments • Institutional Development • IRENA (AOSIS proposal 1997) • Feed in Tariff approach • Investment in Renewables • Financing through other global taxes • Tobin Tax (Epstein-Gelbspan proposal) • Air travel tax • Progressive global tax (Baer et al) • “Excess” emissions penalty (Brazilian Proposal for Kyoto)

4. Pros and Cons of Cabon Tax • Pro • Internalization of externalities • Revenue generation (but contrary to ecotaxation conception) • Discouragement of rent seeking • Con • Uncertainty (how high a tax is needed?) • Equity impact, Development impact • Tinbergen critique (tools and goals) • Dual pricing and institutions

5. Impact of $100/tCO2 ($367/tC)

6. Implications for Development • Balance of payments: oil imports, impact of global recession on exports • Fiscal Deficit: Tariff revenue, subsidies to low income households, recession and revenue, welfare spending • Inflation: Energy prices, exchange rate depreciation, budget deficit • Growth: Aggregate demand, shift of investment to energy, welfare costs

7. The Development Crises • Traditional development and MDGs • Solution: conventional financial flows • The impact of climate change • Solution: Financial and support for adaptation • Impact of OECD climate policies (e.g., carbon tax) • Solution: Policy coherence in North • Impact of own climate policies (especially energy) • Solution: New and additional resources for mitigation and adaptation • The growth conundrum: Has the age of growth come to an end?

8. Stern: Stabilization Trajectories

9. Emission Trajectories for 450 ppm 80% global reductions by 2050 What’s left for the South? 90% by 2050 in the North What kind of climate regime can make this possible?

10. An Alternative Conception

13. Emissions and Income Source: World Bank (1998); Marland, et al. (1998).

14. The Role of Energy • Main difference between rich and poor countries • Strongly correlated with HD indicators • Developing countries need to expand electricity and transport infrastructure three to four times to reach basic needs goals • Expansion is constrained not by demand (efficiency, population) but by supply (investment capacity). • Over 75% emissions from the energy sector • Projected developing country energy growth (3 to 5%) means more emissions despite rising energy efficiency.

17. 2000 2005 2030 ~5.1 ~5.6 ~6.9 OECD ~1.0 ~1.1 ~1.8 EIT ~3.6 4.7 ~9 World ~9.7 11.4 17.7 Developing Country Energy Deficit Energy Consumption per capita Developing Countries

18. Example: Energy Market • Electricity to low and middle income subsidized (3-6 cents per kWh); also subsidy on natural gas • Low taxes on petroleum products, especially diesel and kerosene, compensation for global price increases • Incentives for alternative generation: levelized tariffs across time (20 years) and sources. • Levelized tariffs for distributors • Significant suppressed demand (brown outs, limited access) • Rising prices leading to resistance and inflation

19. Options • Carbon taxes and cap and trade can lead to higher prices with cascading impacts, and will need compensating policies • Cap and trade: need investment in institutions to benefit from market opportunities • Investment option: public supported investment program in renewables, subsidized as needed in line with welfare implications, but will need global financing