|Working Group III: Mitigation|
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8.3 Costs of Domestic Policy to Mitigate Carbon Emissions
Particularly important for determining the gross mitigation costs is the magnitude of emissions reductions required in order to meet a given target, thus the emissions baseline is a critical factor. The growth rate of CO2 depends on the growth rate in GDP, the rate of decline of energy use per unit of output, and the rate of decline of CO2 emissions per unit of energy use.
In a multi-model comparison project that engaged more than a dozen modelling teams internationally, the gross costs of complying with the Kyoto Protocol were examined, using energy sector models. Carbon taxes are implemented to lower emissions and the tax revenue is recycled lump sum. The magnitude of the carbon tax provides a rough indication of the amount of market intervention that would be needed and equates the marginal abatement cost to meet a prescribed emissions target. The size of the tax required to meet a specific target will be determined by the marginal source of supply (including conservation) with and without the target. This in turn will depend on such factors as the size of the necessary emissions reductions, assumptions about the cost and availability of carbon-based and carbon-free technologies, the fossil fuel resource base, and short- and long-term price elasticities.
With no international emission trading, the carbon taxes necessary to meet the Kyoto restrictions in 2010 vary a lot among the models. Note from Table TS.416 that for the USA they are calculated to be in the range US$76 to US$322, for OECD Europe between US$20 and US$665, for Japan between US$97 and US$645, and finally for the rest of OECD (CANZ) between US$46 and US$425. All numbers are reported in 1990 dollars. Marginal abatement costs are in the range of US$20- US$135/tC if international trading is allowed. These models do not generally include no regrets measures or take account of the mitigation potential of CO2 sinks and of greenhouse gases other than CO2.
However, there is no strict correlation between the level of the carbon tax and GDP variation and welfare because of the influence of the country specifics (countries with a low share of fossil energy in their final consumption suffer less than others for the same level of carbon tax) and because of the content of the policies.
The above studies assume, to allow an easy comparison across countries, that
the revenues from carbon taxes (or auctioned emissions permits) are recycled
in a lump-sum fashion to the economy. The net social cost resulting from a given
marginal cost of emissions constraint can be reduced if the revenues are targetted
to finance cuts in the marginal rates of pre-existing distortionary taxes, such
as income, payroll, and sales taxes. While recycling revenues in a lump-sum
fashion confers no efficiency benefit, recycling through marginal rate cuts
helps avoid some of the efficiency costs or dead-weight loss of existing taxes.
This raises the possibility that revenue-neutral carbon taxes might offer a
double dividend by (1) improving the environment and (2) reducing the costs
of the tax system.
Where to recycle revenues from carbon taxes or auctioned permits depends upon
the country specifics. Simulation results show that in economies that are especially
inefficient or distorted along non-environmental lines, the revenue-recycling
effect can indeed be strong enough to outweigh the primary cost and tax-interaction
effect so that the strong double dividend may materialize. Thus, in several
studies involving European economies, where tax systems may be highly distorted
in terms of the relative taxation of labour, the strong double dividend can
be obtained, in any case more frequently than in other recycling options. In
contrast, most studies of carbon taxes or permits policies in the USA demonstrate
that recycling through lower labour taxation is less efficient than through
capital taxation; but they generally do not find a strong double dividend. Another
conclusion is that even in cases of no strong double-dividend effect, one fares
considerably better with a revenue-recycling policy in which revenues are used
to cut marginal rates of prior taxes, than with a non-revenue recycling policy,
like for example grandfathered quotas.
As well as the total costs, the distribution of the costs is important for the overall evaluation of climate policies. A policy that leads to an efficiency gain may not be welfare improving overall if some people are in a worse position than before, and vice versa. Notably, if there is a wish to reduce the income differences in the society, the effect on the income distribution should be taken into account in the assessment.
The distributional effects of a carbon tax appear to be regressive unless the tax revenues are used either directly or indirectly in favour of the low-income groups. Recycling the tax revenue by reducing the labour tax may have more attractive distributional consequences than a lump-sum recycling, in which the recycled revenue is directed to both wage earners and capital owners. Reduced taxation of labour results in increased wages and favours those who earn their income mainly from labour. However, the poorest groups in the society may not even earn any income from labour. In this regard, reducing labour taxes may not always be superior to recycling schemes that distribute to all groups of a society and might reduce the regressive character of carbon taxes.
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