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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

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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  • Fankhauser, Samuel & Martin, Nat, 2010. "The economics of the CDM levy: Revenue potential, tax incidence and distortionary effects," Energy Policy, Elsevier, vol. 38(1), pages 357-363, January.
    • Handle: RePEc:eee:enepol:v:38:y:2010:i:1:p:357-363
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    References listed on IDEAS

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    1. Fankhauser, Samuel & Hepburn, Cameron, 2009. "Carbon markets in space and time," LSE Research Online Documents on Economics 37606, London School of Economics and Political Science, LSE Library.
    2. Samuel Fankhauser, 2009. "The costs of adaptation," GRI Working Papers 7, Grantham Research Institute on Climate Change and the Environment.
    3. 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.
    4. Michael Wara, 2007. "Is the global carbon market working?," Nature, Nature, vol. 445(7128), pages 595-596, February.
    5. Fankhauser, Samuel, 2009. "The costs of adaptation," LSE Research Online Documents on Economics 37610, London School of Economics and Political Science, LSE Library.
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    Citations

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    Cited by:

    1. Thierry Bréchet & Yann Ménière & Pierre M. Picard, 2016. "The Clean Development Mechanism in a world carbon market," Canadian Journal of Economics, Canadian Economics Association, vol. 49(4), pages 1569-1598, November.
    2. Bowen, Alex, 2011. "Raising finance to support developing country action: some economic considerations," LSE Research Online Documents on Economics 37572, London School of Economics and Political Science, LSE Library.
    3. 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.
    4. 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.
    5. repec:old:wpaper:334 is not listed on IDEAS
    6. 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.
    7. Thierry Bréchet & Yann Ménière & Pierre M. Picard, 2016. "The Clean Development Mechanism in a world carbon market," Canadian Journal of Economics, Canadian Economics Association, vol. 49(4), pages 1569-1598, November.
    8. Fankhauser, Samuel & Burton, Ian, 2011. "Spending adaptation money wisely," LSE Research Online Documents on Economics 36255, London School of Economics and Political Science, LSE Library.
    9. 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.
    10. 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.
    11. Simon Quemin & Christian Perthuis, 2019. "Transitional Restricted Linkage Between Emissions Trading Schemes," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(1), pages 1-32, September.
    12. repec:zbw:hohpro:334 is not listed on IDEAS
    13. Samuel Fankhauser & Ian Burton, 2011. "Spending adaptation money wisely," GRI Working Papers 37, Grantham Research Institute on Climate Change and the Environment.

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