Addressing Climate Change Through a Low-Cost, High-Impact Carbon Tax

• DOI: 10.1177/1070496518821152
• Author: Steven Geroe
• Published date: 01 March 2019
• Date: 01 March 2019
• Subject Matter: Articles

Article

Addressing Climate

Change Through a

Low-Cost, High-Impact

Carbon Tax

Steven Geroe

1

Abstract

This article considers design features of a low-cost, high-impact carbon tax in terms

of emissions reductions, drawing on international implementation experience. Costs

can be reduced by offsetting carbon taxes with reductions in other taxes, using

carbon tax revenue to compensate stakeholders, and incremental implementation.

Impacts can be augmented by investing revenue in emissions reduction activity and

complementary tax incentives for low-emissions technologies. Jurisdictions that have

implemented such carbon taxes have continued to experience strong economic

growth. While revenue and distributionally neutral carbon taxes that do not increase

the overall tax take or change the distribution of wealth have been effectively intro-

duced in many jurisdictions, this has not been the only approach. The more funda-

mental conclusion is that carbon taxes are being designed to maximiz e political

acceptability and minimize economic disruption in their implementation context.

This evidence of convergence toward low-cost, high-impact carbon tax design elem-

ents is establishing a viabl e pathway for international cooperation on carbon pricing

at levels adequate to address climate change. Conversely, recent French experience

indicates that carbon tax increases not based on substantial revenue and distribu-

tional neutrality may not be viable.

Keywords

carbon tax, climate change, distributionally neutral, emissions reduction,

international experience, low cost, high impact, revenue neutral, review

Journal of Environment &

Development

2019, Vol. 28(1) 3–27

!The Author(s) 2019

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DOI: 10.1177/1070496518821152

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1

La Trobe University, Melbourne, Australia

Corresponding Author:

Steven Geroe, La Trobe University, Melbourne, Australia.

Email: stevegeroe@yahoo.com.au

This article considers design features of a low-cost, high-impact carbon tax in

terms of emissions reductions, drawing on lessons from international implemen-

tation experience. Such carbon taxes are being introduced in ways that minimize

economic disruption and maximize political acceptability. In this way, they are

establishing a viable pathway toward international cooperation on carbon pri-

cing at levels adequate to ef‌fectively address climate change. The article does not

provide a comparison of the ef‌fectiveness of carbon taxes and emissions trading

schemes (ETS) or other low-carbon regulatory measures. Despite the relatively

lengthy history of United Nations Framework Convention on Climate Change

(UNFCCC) and European Union (EU) ETS implementation, ETS are only now

being trialed in a signif‌icantly larger number of other jurisdictions (World Bank

Group, 2017, p. 12). In coming years, outcomes in jurisdictions that are in the

early stages of implementation, such as China, Korea, and several U.S. states

and regions, will provide a stronger data set for comparison. Rather the article

identif‌ies common elements of low-cost, high-impact approaches to carbon taxes

and variations of these elements around the world. This pattern of analysis

ref‌lects Dani Rodrik’s (2008) conception of a common application of ‘‘higher

order economic principles’’ at a fundamental level, combined with dif‌ferentiated

local policy implementation ‘‘recipes’’ (pp. 9, 55). These local variations can also

be seen in an experimental light, in terms of forming a data set for the ‘‘discov-

ery’’ of regulatory best practice (Rodrik, 2008, pp. 23–27).

Before the structure of this article is introduced, a working def‌inition of what

is meant by ‘‘low-cost, high-impact’’ herein is provided. The most direct method

of achieving a low-cost tax is obviously to set a low carbon tax rate. Other ways

of ameliorating impacts include the following:

– Of‌fset ting carbon tax impacts with corresponding reductions in other taxes

– Usi ng carbon tax revenue to compensate consumers, businesses, or other

stakeholders

– Ame liorating impacts on businesses (with f‌low-on benef‌its to consumers)

through phased/incremental implementation

Ways to increase the impact of carbon taxes (at whatever level they are

imposed) include the following:

– Usi ng carbon tax revenue to reduce emissions, thereby accomplishing more

reductions per unit of tax imposed

– Com bining a carbon tax with complementary tax incentives/deductions for

low-emissions technology to achieve more emissions reductions per unit of

tax involved

– Complementary regulatory measures to achieve more emissions reductions per

unit of tax involved (including ETS, feed-in tarif‌f [FIT], renewable portfolio

standard [RPS], subsidies, and research and development [R&D] support)

4Journal of Environment & Development 28(1)