Overcoming Public Resistance to Carbon Taxes

Carbon taxes represent a cost-effective way to steer the economy toward a greener future. In the real world, their application has however been limited. In this paper, we address one of the main obstacles to carbon taxes: public opposition. We identify drivers of and barriers to public support, and, under the form of stylized facts, provide general lessons on the acceptability of carbon taxes. We derive our lessons from a growing literature, as well as from a combination of policy “failures” and “successes.” Based on our stylized facts, we formulate a set of suggestions concerning the design of carbon taxes. We consider the use of trial periods, tax escalators, environmental earmarking, lump-sum transfers, tax rebates, and advanced communication strategies, among others. This paper contributes to the policy debate about carbon taxes, hopefully leading to more success stories and fewer policy failures

Distributional effects of public investment when wealth and classes are back

In developed economies, wealth inequality is high, while public capital is underprovided. Here, we study the impact of heterogeneity in saving behavior and income sources on the distributional effects of public investment. A capital tax is levied to finance productive public capital in an economy with two types of households: high income households who save dynastically and middle income households who save for retirement. We find that inequality is reduced the higher the capital tax rate is and that low tax rates are Pareto‐improving. There is no clear‐cut trade‐off between efficiency and equality: middle income households’ consumption is maximal at a capital tax rate that is higher than the rate which maximizes high income households’ consumption

Five lessons from COVID-19 for advancing climate change mitigation

The nexus of COVID-19 and climate change has so far brought attention to short-term greenhouse gas (GHG) emissions reductions, public health responses, and clean recovery stimulus packages. We take a more holistic approach, making five broad comparisons between the crises with five associated lessons for climate change mitigation policy. First, delay is costly. Second, policy design must overcome biases to human judgment. Third, inequality can be exacerbated without timely action. Fourth, global problems require multiple forms of international cooperation. Fifth, transparency of normative positions is needed to navigate value judgments at the science-policy interface. Learning from policy challenges during the COVID-19 crisis could enhance efforts to reduce GHG emissions and prepare humanity for future crises

Infrastructure and inequality: insights from incorporating key economic facts about household heterogeneity

We study the impacts of investment in public capital on equity and efficiency. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. We find that in the long run, public investment is Pareto-improving and that it reduces inequality in wealth, welfare, and income at the same time, if it is financed by a capital tax. Consumption tax financing is also Pareto-improving but distribution-neutral. Only for labor tax financing, a trade-off between equity and efficiency occurs. Additionally, we find that agents differ in their preferred tax rates.The results for capital and labor tax financing are valid for both, the case of decreasing and constant returns to accumulable factors

The fiscal benefits of stringent climate change mitigation: an overview

The Paris Agreement’s very ambitious mitigation goals, notably to ‘pursue efforts’ to limit warming to 1.5°C, imply that climate policy will remain a national affair for some time. One key obstacle to very ambitious national mitigation is that some policy makers perceive this to be in competition with major goals of fiscal policy, such as public investment or debt reduction. However, climate policy may actually contribute to these other objectives. Importantly, many fiscal implications of substantial carbon prices, which are essential for stringent mitigation targets such as the 1.5°C goal, have long been neglected by economic analyses of climate change mitigation. We systematically review recent contributions on interactions between climate policy and public finance, which include many topics beyond the classic `double dividend’ of environmental tax swaps. We can thus identify new conclusions about climate policy designs that may overcome fiscal objections and research gaps. We find that national climate policy often aligns with other objectives, provided that climate policies and fiscal policies are integrated well. A first class of interactions concerns public revenue-raising: carbon pricing can replace distortionary taxes and alleviate international tax competition; climate policy also changes asset values, which impacts the base of non-climate taxes and boosts productive investment. Second, they concern public spending, which needs to be restructured as a part of climate policy, while carbon pricing revenues may be recycled for public investment. Third, distributional impacts of climate policies include changes to household expenditures, to asset values and to employment; balancing them often requires fiscal policies. Our findings underline that jointly considering climate policy and fiscal policy can help to make substantial mitigation politically feasible.</p

The fiscal benefits of stringent climate change mitigation: an overview

The Paris Agreement’s very ambitious mitigation goals, notably to ‘pursue efforts’ to limit warming to 1.5°C, imply that climate policy will remain a national affair for some time. One key obstacle to very ambitious national mitigation is that some policy makers perceive this to be in competition with major goals of fiscal policy, such as public investment or debt reduction. However, climate policy may actually contribute to these other objectives. Importantly, many fiscal implications of substantial carbon prices, which are essential for stringent mitigation targets such as the 1.5°C goal, have long been neglected by economic analyses of climate change mitigation. We systematically review recent contributions on interactions between climate policy and public finance, which include many topics beyond the classic `double dividend’ of environmental tax swaps. We can thus identify new conclusions about climate policy designs that may overcome fiscal objections and research gaps. We find that national climate policy often aligns with other objectives, provided that climate policies and fiscal policies are integrated well. A first class of interactions concerns public revenue-raising: carbon pricing can replace distortionary taxes and alleviate international tax competition; climate policy also changes asset values, which impacts the base of non-climate taxes and boosts productive investment. Second, they concern public spending, which needs to be restructured as a part of climate policy, while carbon pricing revenues may be recycled for public investment. Third, distributional impacts of climate policies include changes to household expenditures, to asset values and to employment; balancing them often requires fiscal policies. Our findings underline that jointly considering climate policy and fiscal policy can help to make substantial mitigation politically feasible.</p

The economics of waste oil recycling in the EU

In 2018, 1.6 million tonnes of waste oil were collected in the European Union. About 61% of the waste oil was regenerated – i.e. it was turned into base oil again – and 39% followed energy recovery pathways either in the form of conversion to fuel or via direct incineration. Although the life-cycle literature largely agrees that regeneration outperforms energy recovery in the EU in terms of greenhouse gas emissions and societal costs, policies to boost regeneration and their socio-economic impacts remain underexplored. We fill this gap by discussing policies for managing waste oil flows and by systematically assessing their socio-economic impacts. We analyse different policies that would induce an increase in the regeneration rate of waste oil from the current 61% to either 70% or 85% and assess how the type and magnitude of impacts as well as their distribution across different actors varies, depending on the policy design. The policies lead to a net saving in terms of avoided societal costs and to moderate gains in employment. However, when accounting for estimated administrative costs, these benefits are likely insufficient to justify regulatory intervention.</p

Climate action with revenue recycling has benefits for poverty, inequality and well-being

Existing estimates of optimal climate policy ignore the possibility that carbon tax revenues could be used in a progressive way; model results therefore typically imply that near-term climate action comes at some cost to the poor. Using the Nested Inequalities Climate Economy (NICE) model, we show that an equal per capita refund of carbon tax revenues implies that achieving a 2 °C target can pay large and immediate dividends for improving well-being, reducing inequality and alleviating poverty. In an optimal policy calculation that weighs the benefits against the costs of mitigation, the recommended policy is characterized by aggressive near-term climate action followed by a slower climb towards full decarbonization; this pattern—which is driven by a carbon revenue Laffer curve—prevents runaway warming while also preserving tax revenues for redistribution. Accounting for these dynamics corrects a long-standing bias against strong immediate climate action in the optimal policy literature

Protecting the poor with a carbon tax and equal per capita dividend

We find that if all countries adopt the necessary uniform global carbon tax and then return the revenues to their citizens on an equal per capita basis, it will be possible to meet a 2 °C target while also increasing wellbeing, reducing inequality and alleviating poverty. These results indicate that it is possible for a society to implement strong climate action without compromising goals for equity and development