The first day of the Third World Bank Tax Conference on 30 September 2021 included a session on environmental taxes, focusing on carbon pricing and carbon taxes. Some issues raised in the discussion are summarised below.
Carbon rebate mechanisms
The need to address concerns about carbon price impacts can make room for stronger carbon pricing. Different forms of rebating such as output-based rebating, abatement-based rebating or lump-sum rebating have different effects on emission intensity reduction and emissions price pressure. There are newer forms of rebating that aim to reward additional emissions intensity reductions and are given in proportion to output (intensity-based output rebating, IBOR) or as a rebate of a share of emissions payments made (intensity-based emissions rebating, IBER). Intensity-based rebating can amplify incentives for reductions without raising the carbon price.
Definition of a carbon tax
Carbon taxes are an efficient way to address the problem of global warming. In investigating the impact of carbon taxes we need to establish the definition of a carbon tax. For example, we need to determine if we are including taxes such as fuel duty/gasoline tax as carbon taxes. Some international organisations have published data on which countries have introduced carbon taxes, but for international comparisons and analysis the definition of a carbon tax is important.
Effects of carbon taxes
There are three general effects arising from the use of a carbon tax:
- Substitution effect – this encourages a move away from carbon intensive goods.
- Income effect – the carbon tax reduces the consumption of normal goods, most of which would cause carbon emissions.
- Income production effect – the carbon tax depresses income production, by reducing the return to earning income.
All taxes have an income effect and an income production effect, so all taxes fight global warming to some extent. We have a tendency to focus on the substitution effect, but one could envisage some circumstances where the income effect and the income production effect would have a greater impact on emissions than the substitution effect.
Using the revenue from carbon taxes
How the revenue from the carbon tax is used by the government can affect the level of carbon emissions. Government purchases are responsible for few carbon emissions compared to spending in other parts of the economy. Carbon taxes are a small percentage of total government revenue (although they should be more). Therefore collecting more taxes can fight carbon emissions and global warming through the income and income production effects.
If the government keeps the revenue and spends it on its normal items of expenditure, this may be more beneficial in terms of reducing emissions than if the government returns the money in the form of rebates.
Other issues on carbon taxes
Other issues mentioned in connection with carbon taxes included the following:
- In determining the optimal carbon taxes it may be necessary to take into account the current tax system.
- The effect of carbon taxes on innovation was discussed. Would the increased input costs dampen innovation or could carbon taxes help innovation by encouraging the development of carbon reducing technologies.
- The income effect and income production effect reduce economic growth. There are implications for low and middle income countries that may be considering the introduction carbon taxes.
