Should the Carbon Price Be the Same in All Countries?

• Published date: 01 October 2016
• Author: KATHELINE SCHUBERT,CEES WITHAGEN,ANTOINE D'AUTUME
• Date: 01 October 2016
• DOI: http://doi.org/10.1111/jpet.12162

SHOULD THE CARBON PRICE BETHESAME IN ALL COUNTRIES?

ANTOINE D’AUTUME and KATHELINE SCHUBERT

Paris School of Economics, University Paris 1 Panth´

eon–Sorbonne

CEES WITHAGEN

VU University Amsterdam

Abstract

International differences in fuel taxation are huge, and may be justi-

f‌ied by different local negative externalities that taxes must correct, as

well as by different preferences for public spending. In this context,

should a worldwide uniform carbon tax be added to these local taxes

to correct the global warming externality? We address this question in

a second best framework `

alaRamsey, where public goods have to be f‌i-

nanced through distortionary taxation and the cost of public funds has

to be weighted against the utility of public goods. We show that when

lump-sum transfers between countries are allowed for, the second best

tax on the polluting good may be decomposed into three parts: one,

country-specif‌ic, dealing with the local negative externality, a second

one, country-specif‌ic, dealing with the cost of levying public funds, and

a third one, global, dealing with the global externality and which can be

interpreted as the carbon price. Our main contribution is to show that

the uniformity of the carbon price should still hold in this second best

framework. Nevertheless, if lump-sum transfers between governments

are impossible to implement, international differentiation of the car-

bon price is the only way to take care of equity concerns.

1. Introduction

The virtues of a uniform carbon price, taking the form of a world carbon tax or being

the result of a world emission permits market, are well recognized. A uniform carbon

price, ref‌lecting the true social cost of emissions, is the best incentive to curb all negative

externalities associated with fossil fuel consumption and global warming. Uniformity of

the price implies the equalization of marginal abatement costs and therefore minimizes

Antoine d’Autume, Paris School of Economics, University Paris 1 Panth´

eon–Sorbonne, Paris, France

(dautume@univ-paris1.fr). Katheline Schubert, Paris School of Economics, University Paris 1

Panth´

eon–Sorbonne, Paris, France (schubert@univ-paris1.fr). Cees Withagen, VU University Amster-

dam, The Netherlands (cwithagen@feweb.vu.nl).

We thank Julien Daubanes, Pierre Lasserre, St´

ephane Gauthier, and especially Roger Guesnerie for

useful discussions. Antoine d’Autume and Katheline Schubert acknowledge the support of the French

National Research Agency (ANR) under the CLEANER project (ANR˙NT09˙505778). Cees Withagen

gratefully acknowledges f‌inancial support from FP7-IDEAS-ERC Grant No. 269788.

Received March 11, 2013; Accepted March 29, 2015.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (5), 2016, pp. 709–725.

709

710 Journal of Public Economic Theory

Table 1: Excise on premium unleaded gasoline in some OECD countries, 2012

(% of the consumer price)

Germany Denmark United States Finland France Italy Japan United Kingdom Sweden

39.0 33.9 13.1 37.9 37.3 40.1 38.1 40.6 36.6

Source: IEA Statistics, Energy prices, and taxes, 2013

the worldwide cost of abatement of emissions. The redistribution of tax receipts or the

initial allocation of permits then offers the possibility to accompany carbon taxation with

an international redistribution scheme and to share equitably the burden of taxation

between countries. This optimistic picture is often questioned in the name of realism.

Existing differences in national energy taxation, especially fuel taxation, are consid-

erable (see Table 1). The question that arises is whether we should consider such taxes

as implicit carbon taxes and therefore abstain from superimposing a specif‌ic carbon tax.

Moreover, is it really possible to use the allocation of tax receipts or emission quo-

tas to alter substantially the world distribution of income? First of all, a consequence of

using a quota allocation mechanism is clearly that the implied lump-sum transfers to

local governments are restricted to be positive. Second, will governments even accept

a departure from the simple rule that each country should be paid back exactly the

amount of taxes it paid or the value of the permits it had to buy? If international trans-

fers are so restricted, isn’t it preferable to allow poor countries to face a lower carbon

price? Chichilnisky and Heal (1994) put forward such an argument against the inter-

national equalization of abatement costs and suggested that a lower effort should be

required from poor countries. Shiell (2003) followed up on this idea and in particular

characterized the set of second best optimal allocations when intercountry transfers are

restricted to be positive or to be exactly equal to the sums paid to the world regulator.

Sandmo (2005) also pointed out that the carbon price must be uniform if perfect inter-

national transfers are possible, but should be differentiated when they are not, to ref‌lect

redistributive concerns.

A proper analysis of these issues requires a clarif‌ication of the purpose of exist-

ing fuel taxes in the f‌irst place. If no clear economic reason may be invoked for their

existence, adding to them a uniform carbon price has no chance to appear optimal.

However, if existing taxes are, in some sense, already f‌ixed at an optimum level, adding

a common tax to curb global warming may be warranted. Existing fuel taxation has two

prime objectives. The f‌irst one is to counter local externalities independently of global

warming. For example, burning of fossil fuel contributes to global warming through

CO2emissions, but also leads to SO2and particulate matters emissions, which have a lo-

cal effect. The second objective of fuel taxation is that it offers governments an easy way

to levy funds and f‌inance the provision of public goods. The French gasoline tax, the so-

called TICE (Taxe Int´

erieure sur la Consommation d’Energie), an excise tax currently

f‌ixed at 0.61 euros per liter, has indeed been created taking explicitly into account the

two objectives of reducing negative externalities associated with fuel consumption by

cars and of providing means to f‌inance highway construction.

International differences in fuel taxation may a priori be justif‌ied by different local

negative externalities that taxes must correct, as well as by different preferences for

public spending in the different countries. In this context, should a worldwide uniform

carbon tax, or emission permit price, be added to these optimal local taxes? This is the

question we consider.