Revenues From The Carbon

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The levels of the carbon taxes proposed in the various models as necessary to make substantial reductions in carbon emissions are between $100 and $400 per ton of carbon (see Boero et al. 1991:87-9, Table 5). A $250 tax is equivalent to $0.75 per gallon on petrol or $30 per barrel on oil (Cline 1992: 147). Taxes at these levels would raise large sums of revenue. A $100 per ton global tax rate would raise of the order of $500 billion annually, and about $130 billion from the USA alone (Cline 1992:151). Schelling considers that 'a carbon tax sufficient to make a big dent in the greenhouse problem would have to be roughly equivalent to a dollar per gallon on motor fuel.. .(which) would currently yield close to half a trillion dollars a year in revenue' (Schelling 1992:11).

Figure 12.3 GDP losses associated with reductions in global CO2 emissions relative to base projections (various studies and years)

Key to models shown:

AB Anderson, D. and Bird, C.D. (1990) The carbon accumulations problem and technical progress', University College London and Balliol College, Oxford, November

B Burniaux, J.-M., Martin, J.-P., Nicoletti, G. and Martins, J.-O. (1991a) The costs of policies to reduce global emissions of CO2: initial simulation resultus with GREEN', Working Paper 103, OCDE/GD(91)115, June, Resource Allocation Division, Paris: OECD

C Cline, W. (1989) 'Political economy of the greenhouse effect', Institute for International Economics, Washington, DC, April

EB Edmonds, J. and Barnes, D.W. (1990a) 'Estimating the marginal cost of reducing global fossil fuel CO2 emissions', Global Environmental Change Programme, PNL-SA-18361, Pacific Northwest Laboratory, Washington, DC ER Edmonds, J. and Reilly, J.M. (1985) Global Energy: Assessing the Future, Oxford: Oxford University Press MR Manne, A.S. and Richels, G. (1991) 'Global CO2 emission reductions—the impacts of rising energy costs', The Energy Journal, 12(1):87-107

M Mintzer, I.M. (1987) 'A matter of degrees: the potential for controlling the greenhouse effect', Research Report 5, Washington, DC: World Resources Institute

N Nordhaus, W. (1990) 'An intertemporal general equilibrium model of economic growth and climate change', Mimeo, Yale University

WW Whalley, J. and Wigle, R. (1990) 'The international incidence of carbon taxes', Mimeo, National Bureau of Economic Research, Cambridge, MA, and Wilfrid Laurier University, Waterloo Source: Boero et al. 1991:2

Of the global studies only Whalley and Wigle (1990, as reviewed in Boero et al. 1991) vary the international distribution of the carbon revenues, considering a producer tax (revenues retained by energy producers), consumer tax and a distribution to countries on an equal per capita basis. Not surprisingly they find that changing the distribution makes a large difference to different regions' GDP losses.

GDP losses are not only affected by who gets the revenues. They also crucially depend on what is done with them. If they are simply saved, then the short-term effect of the carbon tax is one of contractionary pressure, with reductions in GDP as a result. The long-run effect depends on the way the extra government saving influences the evolution of the economy.

However, evaluating the tax on the basis of these effects is to confuse the issue. In reality, carbon tax revenues will accrue to national governments, which will have the option of saving them or cutting other taxes. For the effects of the carbon taxes alone to be assessed, independently of such issues as the overall level of aggregate demand or the public-sector borrowing requirement, it is highly desirable that they are offset by the reduction of other taxes. This is the clear view of both Boero et al. and Cline:

We suggest that, in order to keep the debate clear, GHG exercises should always be conducted in a revenue-neutral fashion.

In most cases it would be desirable to recycle these tax revenues, to avoid contractionary pressure on aggregate demand and thus recession This contractionary pressure is the chief reason the Congressional Budget Office (1990) estimated that a phase-in of a $100 carbon tax over 10 years for the United States would cause a loss of 2% of GDP annually by the second five years. Such estimates reflect primarily the demand-depressing effects of any tax, rather than the production-possibility effects of curtailing energy.. However, for long-term analysis it seems preferable to exclude short-term macroeconomic effects. Keynesian demand-reduction overstates the damage, because collected revenue can be returned to the economy.

Pearce (1991:940, note 6) expresses surprise 'that most of the simulations of hypothetical carbon taxes do not consider revenue neutrality. This may reflect limitations of some of the models, e.g. computable general equilibrium models.. In this case macroeconomic models are also needed.'

Using such macromodels, the effects on national economies of recycling the tax revenues are clearly shown in several country studies, most consistently in the HERMES modelling of the effects of an energy tax on the economies of different member states of the European Union (Table 12.2).

The three revenue use variants in Table 12.2 were simple retention by the government (Tax retained) and complete revenue-recycling, through either the reduction of employers' social security taxes (Social security) or reduction in direct taxation (Direct taxes). In every case it can be seen that, as expected,

Table 12.2 GDP and employment effects in 2005 of constant real $10 per barrel energy tax imposed in 1990 with different revenue use, four countries separately and together

Direct taxes'

Social security1

Tax retainedb

Direct taxeSb

GDP effects (% difference from baseline)

West Germany France


United Kingdom Europe-4

Employment effects (unemployment rate, % difference from baseline)

West Germany France

Direct taxesa

Social securitya

Tax retainedb

Direct taxeSb

Italy -0.0




United Kingdom 0.4




Europe-4 0.01


Sources: aStandaert 1992: pp. 9, 14, Tables 3/1, 4/1; pp. 22-36, Tables A1a-A8a

bKaradeloglou 1992: pp. 182, 195, Tables 3/2, 7/2

Table 12.3 Effects on GDP and employment in four EU countries in 2000 after introduction of $10 energy tax in 1991





GDP effects (% difference from baseline)

(1) Belgiuma -0.69




(2) Denmarkb -1.07




(3) Portugala -2.62




(4) Irelandb -0.8




Employment effects (employment, % difference

? from base)

(1) Belgiuma -0.35




(2) Denmarkb 0.57




(3) Portugala -2.55




(4) Irelandb -0.8




(2) Andersen 1992: pp. 88, 90-2, Tables 3/1, 4/1, 4/2, 4/3

(3) Modesto 1992: pp. 123, 125, 126, 128, Tables 2/1, 3/1, 4/1, 5/1

(4) Fitzgerald and McCoy 1992: p. 156, Table 7/1 Notes: aCommon EU tax.

bTax imposed unilaterally.

(2) Andersen 1992: pp. 88, 90-2, Tables 3/1, 4/1, 4/2, 4/3

(3) Modesto 1992: pp. 123, 125, 126, 128, Tables 2/1, 3/1, 4/1, 5/1

(4) Fitzgerald and McCoy 1992: p. 156, Table 7/1 Notes: aCommon EU tax.

bTax imposed unilaterally.

the effects on both GDP and employment are markedly less negative under the tax recycling variants: with regard to employment the unemployment rate falls absolutely in all four countries under consideration.

These results are broadly consistent with HERMES modelling results for other countries. Table 12.3 shows HERMES results for the year 2000 for four small EU countries of the introduction in 1990 of a $10 per barrel energy tax, maintained in real terms. The four columns show simulations in which the tax is retained by the government (A) and three different methods of recycling it through the economy: by reducing direct taxes on households (B), by reducing payroll taxes on employers (C) and by reducing VAT (D). As with Table 12.2, the macroeconomic effects of recycling the revenue are significantly more positive than in the tax retention case.

The positive employment effect of a carbon tax is not only due to the lower relative price of labour compared with energy. It also derives from the relative labour intensity of non-carbon-intensive sectors, which can expect to experience increased demand due to the relative price shift. The effect is brought out clearly in the detailed study by Proops et al. (1993). In order to provide insights into the implications of a changed structure of final demand due to measures to limit CO2 emissions, they used input-output techniques to calculate the embodied energy and CO2 emissions of different industrial sectors. In one of their simulations they impose, on an underlying growth rate of 2 per cent, an extra 8 per cent per annum increase in the demand for commodities in the tertiary sectors (e.g. telecommunications, financial and other services) and cut demand in energy-intensive sectors proportionally to maintain the overall 2 per cent growth rate. They find that, in the UK, CO2 emissions fall by 3.45 per cent per annum and employment rises by 4.60 per cent per annum, reflecting the tertiary sector's higher labour intensity (Proops et al. 1993:2067).

Another country model that has been used to analyse the macroeconomic effects of carbon abatement is the MDM model of the UK economy. Barker and Lewney (1991) offset the tax by reducing VAT and find that the GDP effects of reaching the Toronto target (20 per cent cut in CO2 emissions from 1988 base by 2005) 'are so small that they can be ignored' (Barker and Lewney 1991:22). Sondheimer (1991) modelled the introduction of a tax of £30 per ton in 1991, reducing direct and indirect taxes equally in compensation. By the year 2000, GDP was up by 0.52 per cent and unemployment down 0.07 per cent, both from base.

These results relied on a fairly simplistic treatment of energy demand and the possibility of interfuel substitution, which was substantially improved by the introduction of a linked energy sub-model for the study, reported by Barker et al. (1992), of the effects on the UK economy of the proposed EU carbon/ energy tax. Their scenarios were tax retention by the government, what Barker et al. call the 'depression scenario', EU tax with VAT offset and EU tax with income tax offset. The percentage differences of GDP from base by 2005 were -0.37, 0.17 and 0.09. Once again, the recycling of the tax converted a cost into a benefit.

The issue of how carbon tax receipts should be recycled through the economy leads to consideration of distortions in the economy and how the carbon tax affects them.

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