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

Max Franks, Ottmar Edenhofer and Kai Lessmann

No 2015.37, Working Papers from Fondazione Eni Enrico Mattei

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.

Keywords: Carbon Pricing; Green Paradox; Infrastructure; Optimal Taxation; Strategic Instrument Choice; Supply-Side Dynamics; Tax Competition (search for similar items in EconPapers)
JEL-codes: F21 H21 H30 H73 Q38 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-ene, nep-env, nep-pbe and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account (2017)
Working Paper: Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2015.37

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