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Carbon taxes, the greenhouse effect, and developing countries

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Author Info
Shah, Anwar
Larsen, Bjorn

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Abstract

The authors evaluate the case for carbon taxes in terms of national interests. They reach the following conclusions. (A) A global carbon tax involves issues of international resource transfers and would be difficult to administer and enforce. It is thus unlikely to be implemented in the near future. (b) National carbon taxes can raise significant revenues cost-effectively in developing countries and are not likely to be as regressive in their impact as commonly perceived. Such taxes can also enhance economic efficiency if introduced as a revenue-neutral partial replacement for corporate income taxes or in cases where subsidies are prevalent. The welfare costs of carbon taxes generally vary directly with the existing level of energy taxes, so a carbon tax should be an instrument of choice for countries such as India and Indonesia, which have few or no energy taxes. A carbon tax can significantly reduce local pollution and carbon dioxide emissions. Cost-benefit analysis shows countries with few or no energy taxes substantially gaining from carbon taxes in terms of an improved local environment. A carbon tax of $10 a ton produces very small output losses for Pakistani industries analyzed in this paper, and the output losses are fully offset by health benefits from reduced emissions of local pollutants - even ignoring the global implications of a reduced greenhouse effect. Tradable permits are preferable to carbon taxes where the critical threshold of the stock of carbon emission beyond which temperatures would rise exponentially is known. Given our current ignorance on the costs of reducing carbon emissions and the threshold effect, a carbon tax appears to be a better and more flexible instrument for avoiding large unexpected costs.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 957.

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Date of creation: 31 Aug 1992
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Handle: RePEc:wbk:wbrwps:957

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Keywords: Environmental Economics&Policies; Energy and Environment; Montreal Protocol; Carbon Policy and Trading; Public Sector Economics&Finance;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. William D. Nordhaus, 1991. "The Cost of Slowing Climate Change: a Survey," The Energy Journal, International Association for Energy Economics, vol. 12(Number 1), pages 37-66.
  2. Shah, Anwar & Whalley, John, 1991. "Tax Incidence Analysis of Developing Countries: An Alternative View," World Bank Economic Review, Oxford University Press, vol. 5(3), pages 535-52, September.
  3. Thomas Sterner, 1989. "Oil Products in Latin America: The Politics of Energy Pricing," The Energy Journal, International Association for Energy Economics, vol. 10(2), pages 25-46.
  4. Uri, Noel D., 1979. "Energy demand and interfuel substitution in India," European Economic Review, Elsevier, vol. 12(2), pages 181-190, April. [Downloadable!] (restricted)
  5. Green, Jerry R. & Sheshinski, Eytan, 1979. "Approximating the efficiency gain of tax reforms," Journal of Public Economics, Elsevier, vol. 11(2), pages 179-195, March. [Downloadable!] (restricted)
  6. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April. [Downloadable!] (restricted)
  7. James M. Poterba, 1991. "Tax Policy to Combat Global Warming: On Designing a Carbon Tax," NBER Working Papers 3649, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Pindyck, Robert S, 1979. "Interfuel Substitution and the Industrial Demand for Energy: An International Comparison," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 169-79, May. [Downloadable!] (restricted)
  9. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July. [Downloadable!] (restricted)
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  11. Bernstein, Jeffrey I., 1994. "Taxes, incentives and production: The case of Turkey," Journal of Development Economics, Elsevier, vol. 45(1), pages 55-79, October. [Downloadable!] (restricted)
  12. Willig, Robert D, 1976. "Consumer's Surplus without Apology," American Economic Review, American Economic Association, vol. 66(4), pages 589-97, September. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lawrence H. Goulder, 1998. "Environmental Policy Making in a Second-Best Setting," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 279-328, November. [Downloadable!]
  2. Arief Anshory Yusuf & Budy P. Resosudarmo, 2007. "On the Distributional Effect of Carbon Tax in Developing Countries: The Case of Indonesia," Working Papers in Economics and Development Studies (WoPEDS) 200705, Department of Economics, Padjadjaran University, revised Aug 2007. [Downloadable!]
  3. Eskeland, Gunnar S. & Jimenez, Emmanuel & Lili Liu & DEC, 1994. "Energy pricing and air pollution : econometric evidence from manufacturing in Chile and Indonesia," Policy Research Working Paper Series 1323, The World Bank. [Downloadable!]
  4. Arief Anshory Yusuf, 2008. "The Distributional Impact of Environmental Policy: The Case of Carbon Tax and Energy Pricing Reform in Indonesia," EEPSEA Research Report rr2008101, Economy and Environment Program for Southeast Asia (EEPSEA), revised Oct 2008. [Downloadable!]
  5. Peter Bohm & Bjorn Larsen, 1994. "Fairness in a tradeable-permit treaty for carbon emissions reductions in Europe and the former Soviet Union," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 4(3), pages 219-239, June. [Downloadable!] (restricted)
  6. Larsen, Bjorn & Shah, Anwar, 1994. "Global tradable carbon permits, participation incentives, and transfers," Policy Research Working Paper Series 1315, The World Bank. [Downloadable!]
    Other versions:
  7. Birdsall, Nancy, 1992. "Another look at population and global warming," Policy Research Working Paper Series 1020, The World Bank. [Downloadable!]
  8. James Boyce & Matthew Riddle & Mark D Brenner, 2005. "A Chinese Sky Trust? Distributional Impacts of Carbon charges and Revenue Recycling in China," Working Papers wp_brenner_riddle_boyce, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  9. Taheripour, Farzad & Khanna, Madhu & Nelson, Charles, 2005. "Welfare Impacts of Alternative Public Policies for Environmental Protection in Agriculture in an Open Economy: A General Equilibrium Framework," 2005 Annual meeting, July 24-27, Providence, RI 19317, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  10. Devarajan, Shantayanan & Go, Delfin S. & Robinson, Sherman & Thierfelder, Karen, 2009. "Tax policy to reduce carbon emissions in south Africa," Policy Research Working Paper Series 4933, The World Bank. [Downloadable!]
  11. Tim Callan & Sean Lyons & Sue Scott & Richard S. J. Tol & Stefano Verde, 2008. "The Distributional Implications of a Carbon Tax in Ireland," Papers WP250, Economic and Social Research Institute (ESRI). [Downloadable!]
    Other versions:
  12. Shreekant Gupta, 2000. "Incentive-Based Approaches for Mitigating Greenhouse Gas Emissions: Issues and Prospects for India," Working papers 85, Centre for Development Economics, Delhi School of Economics. [Downloadable!]
  13. Ross McKitrick, 1997. "Double Dividend Environmental Taxation and Canadian Carbon Emissions Control," Canadian Public Policy, University of Toronto Press, vol. 23(4), pages 417-438, December. [Downloadable!] (restricted)
    Other versions:
  14. Lawrence H. Goulder, 1994. "Environmental Taxation and the "Double Dividend:" A Reader's Guide," NBER Working Papers 4896, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Larsen, Bjorn & Shah, Anwar & DEC, 1992. "World fossil fuel subsidies and global carbon emissions," Policy Research Working Paper Series 1002, The World Bank. [Downloadable!]
  16. Zhang, ZhongXiang & Baranzini, Andrea, 2000. "What do we know about carbon taxes? an inquiry into their impacts on competitiveness and distribution of income," MPRA Paper 13225, University Library of Munich, Germany, revised Jan 2003. [Downloadable!]
    Other versions:
  17. Philip Fearnside, 1997. "Monitoring needs to transform Amazonian forest maintenance into a global warming-mitigation option," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 2(2), pages 285-302, June. [Downloadable!] (restricted)
  18. Larsen, Bjorn, 1994. "World fossil fuel subsidies and global carbon emissions in a model with interfuel substitution," Policy Research Working Paper Series 1256, The World Bank. [Downloadable!]
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