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Should a Carbon Tax be Differentiated Across Sectors?

  • Hoel, Michael

If some, but not all, countries are cooperating to reduce CO2 emissions, it can be argued that: A high carbon tax on carbon-intensive tradable sectors in the cooperating countries will reduce the production of goods from these sectors, and therefore CO2 emissions, in those countries. This will to a large extent be counteracted by increased production of such goods in the countries which have no such policy, however. Since it is total CO2 emissions from all countries which is relevant for the climate, there is little advantage in a policy which simply shifts CO2 emissions from the cooperating countries to other countries. Carbon-intensive tradable sectors should thus face a lower carbon tax than other sectors of the economy.The paper shows that a carbon tax should not be differentiated across sectors in the economy, provided import and export tariffs can be used on all traded goods. It is also shown that such a differentiation of carbon taxes is optimal for the cooperating countries if they are prevented from using tariffs on the traded goods. Informational or political factors constraining the use of tariffs are also likely to constrain the possibility of differentiating carbon taxes between sectors, however.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1066.

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Date of creation: Dec 1994
Date of revision:
Handle: RePEc:cpr:ceprdp:1066
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  1. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-94, Supplemen.
  2. Carraro, Carlo & Siniscalco, Domenico, 1993. "Strategies for the international protection of the environment," Journal of Public Economics, Elsevier, vol. 52(3), pages 309-328, October.
  3. Torvanger, A., 1993. "Efficient Contracts in a Game of Nations Pursuing Greenhouse Gas Emissions Abatement," Memorandum 03/1993, Oslo University, Department of Economics.
  4. Michael Hoel, 1992. "International environment conventions: The case of uniform reductions of emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(2), pages 141-159, March.
  5. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
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