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Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account

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  • Max Franks

    (Potsdam Institute for Climate Impact Research and Berlin Institute of Technology)

  • Ottmar Edenhofer

    (Mercator Research Institute on Global Commons and Climate Change, Berlin Institute of Technology and Potsdam Institute for Climate Impact Research)

  • Kai Lessmann

    (Potsdam Institute for Climate Impact Research)

Abstract

Fiscal considerations may shift governmental priorities away from environmental concerns: Finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter's ability to counteract carbon policies. Further, no green paradox occurs - instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.

Suggested Citation

  • Max Franks & Ottmar Edenhofer & Kai Lessmann, 2015. "Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account," Working Papers 2015.37, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2015.37
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    Cited by:

    1. Habla, Wolfgang, 2016. "The Green Paradox and Interjurisdictional Competition across Space and Time," Working Papers in Economics 668, University of Gothenburg, Department of Economics.
    2. Ritter, Hendrik & Runkel, Marco & Zimmermann, Karl, 2019. "Environmental Effects of Capital Income Taxation - A New Double Dividend?," EconStor Preprints 195172, ZBW - Leibniz Information Centre for Economics.
    3. Michael Gleser & Ralf Elbert & Hongjun Wu, 2023. "Port Competition through Hinterland Connectivity—A Case Study for Potential Hinterland Scope in North Rhine-Westphalia (NRW) Regarding an Environmental Policy Measure," Sustainability, MDPI, vol. 15(3), pages 1-20, January.
    4. Ottmar Edenhofer & Max Franks & Matthias Kalkuhl, 2021. "Pigou in the 21st Century: a tribute on the occasion of the 100th anniversary of the publication of The Economics of Welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1090-1121, October.
    5. Jan Siegmeier & Linus Mattauch & Max Franks & David Klenert & Anselm Schultes & Ottmar Edenhofer, 2015. "A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare," Working Papers 2015.31, Fondazione Eni Enrico Mattei.
    6. Franks, Max & Lessmann, Kai, 2023. "Tax competition with asymmetric endowments in fossil resources," Resources Policy, Elsevier, vol. 83(C).
    7. Adrien Vogt‐Schilb & Stephane Hallegatte, 2017. "Climate policies and nationally determined contributions: reconciling the needed ambition with the political economy," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 6(6), November.
    8. Lint Barrage, 2020. "Optimal Dynamic Carbon Taxes in a Climate–Economy Model with Distortionary Fiscal Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 1-39.
    9. Lin, Boqiang & Jia, Zhijie, 2018. "The energy, environmental and economic impacts of carbon tax rate and taxation industry: A CGE based study in China," Energy, Elsevier, vol. 159(C), pages 558-568.
    10. Runkel, Marco & Kellner, Maximilian, 2018. "Climate Policy and Optimal Public Debt," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181639, Verein für Socialpolitik / German Economic Association.
    11. Karl Zimmermann, 2019. "Public Infrastructure Provision in the Presence of Terms-of-Trade Effects and Tax Competition," EconStor Preprints 193458, ZBW - Leibniz Information Centre for Economics.
    12. Habla, Wolfgang, 2018. "Climate policy under factor mobility: A (differentiated) case for capital taxation," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 100-124.
    13. Edenhofer, Ottmar & Lessmann, Kai & Tahri, Ibrahim, 2024. "Asset pricing and the carbon beta of externalities," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    14. Emmanuel Combet, 2016. "Energy Tax Reform in Time of Crisis - The Case of Energy-Dependent and Open Economies," Working Papers 2016.06, FAERE - French Association of Environmental and Resource Economists.
    15. Gabriel Bachner & Birgit Bednar-Friedl, 2016. "Counterbalancing the Effects of Climate Change Adaptation on Public Budgets: Factor Taxes, Transfers, or Foreign Lending?," Graz Economics Papers 2016-07, University of Graz, Department of Economics.
    16. Bak, Céline & Bhattacharya, Amar & Edenhofer, Ottmar & Knopf, Brigitte, 2017. "Towards a comprehensive approach to climate policy, sustainable infrastructure, and finance," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 11, pages 1-13.
    17. Gregor Schwerhoff & Ottmar Edenhofer & Marc Fleurbaey, 2020. "Taxation Of Economic Rents," Journal of Economic Surveys, Wiley Blackwell, vol. 34(2), pages 398-423, April.
    18. Peszko,Grzegorz & Van Der Mensbrugghe,Dominique & Golub,Alexander Alexandrovich, 2020. "Diversification and Cooperation Strategies in a Decarbonizing World," Policy Research Working Paper Series 9315, The World Bank.

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    More about this item

    Keywords

    Carbon Pricing; Green Paradox; Infrastructure; Optimal Taxation; Strategic Instrument Choice; Supply-Side Dynamics; Tax Competition;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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