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The economics of the CDM levy: Revenue potential, tax incidence and distortionary effects

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  • Fankhauser, Samuel
  • Martin, Nat
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    Abstract

    A levy on the Clean Development Mechanism and other carbon trading schemes is a potential source of finance for climate change adaptation. An adaptation levy of 2% is currently imposed on all CDM transactions which could raise around $500 million between now and 2012. This paper analyses the scope for raising further adaptation finance from the CDM, the economic costs (deadweight loss) of such a measure and the incidence of the levy, that is, the economic burden the levy would impose on the buyers and sellers of credits. We find that a levy of 2% could raise up to $2 billion a year in 2020 if there are no restrictions on demand. This could rise to $10 billion for a 10% tax. Restrictions on credit demand (called supplementarity limits, the requirement that most emission abatement should happen domestically) curtail trade volumes and consequently tax revenues. They also alter the economic impact of the CDM levy. Without supplementarity restrictions sellers (developing countries) bear two-thirds of the cost of the tax. If there are supplementarity limits they can pass on the tax burden to buyers (developed countries) more or less in full. Without supplementarity restrictions the distortionary effect of the levy (its deadweight loss) rises sharply with the tax rate. With them the deadweight loss is close to zero.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 38 (2010)
    Issue (Month): 1 (January)
    Pages: 357-363

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    Handle: RePEc:eee:enepol:v:38:y:2010:i:1:p:357-363

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    Web page: http://www.elsevier.com/locate/enpol

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    Keywords: Clean development mechanism CDM levy Adaptation finance;

    References

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    1. Benitez, Pablo C. & McCallum, Ian & Obersteiner, Michael & Yamagata, Yoshiki, 2007. "Global potential for carbon sequestration: Geographical distribution, country risk and policy implications," Ecological Economics, Elsevier, vol. 60(3), pages 572-583, January.
    2. Samuel Fankhauser & Cameron Hepburn, 2009. "Carbon markets in space and time," LSE Research Online Documents on Economics 37606, London School of Economics and Political Science, LSE Library.
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    Cited by:
    1. Costantini, Valeria & D'Amato, Alessio & Martini, Chiara & Tommasino, Maria Cristina & Valentini, Edilio & Zoli, Mariangela, 2013. "Taxing international emissions trading," Energy Economics, Elsevier, vol. 40(C), pages 609-621.
    2. Copenhagen Economics, 2010. "Tax Treatment of ETS Allowances: Options for Improving Transparency and Efficiency," Taxation Studies 0035, Directorate General Taxation and Customs Union, European Commission.
    3. Thierry Bréchet & Yann Ménière & Pierre M. Picard, 2011. "The clean development mechanism in a globalized carbon market," CREA Discussion Paper Series 11-12, Center for Research in Economic Analysis, University of Luxembourg.
    4. Klaus Eisenack, 2011. "Adaptation financing as part of a global climate agreement: Is the adaptation levy appropriate?," Working Papers V-334-11, University of Oldenburg, Department of Economics, revised Mar 2011.
    5. Thierry Brechet & Yann Meniere & Pierre M. Picard, 2012. "The Clean Development Mechanism in a Global Carbon Market," CEEES Paper Series CE3S-06/12, European University at St. Petersburg, Department of Economics.
    6. Mendoza Beltran, Angelica & den Elzen, Michel G.J. & Hof, Andries F. & van Vuuren, Detlef P. & van Vliet, Jasper, 2011. "Exploring the bargaining space within international climate negotiations based on political, economic and environmental considerations," Energy Policy, Elsevier, vol. 39(11), pages 7361-7371.
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