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Tax policy colloquium on David Weisbach's "Trade and Carbon Taxes"

Good session last Thursday even though David's paper, being primarily empirical (concerning effects of carbon taxes on global emissions under different scenarios, based on a computable general equilibrium model of the world economy) was not entirely tailor-made for our format.

Key unsurprising conclusion was that, if all Annex B countries (i.e., relatively developed economies, taken from the list of Kyoto signatories) adopt a uniform carbon tax, the glass is either half-full or half-empty, compared to the payoff in reduced carbon emissions relative to a global carbon tax. One only gets about a third of the reduction that a global tax would provide, reflecting above all the anticipated rise of China, India, South Korea, and South America (e.g., Brazil) as huge players in the world economy.

This is a much better result than some models suggest, in that carbon leakage (i.e., increased emissions in non-carbon tax countries) potentially, but not in this simulation, would make the whole thing pointless. On the other hand, it's not really good enough to make one believe that uniform adoption by Annex B countries of a carbon tax at plausible levels would come anywhere close to doing the necessary job to rein in global warming.

But suppose you still have two extra hands. On the third hand, bring along China, India, and Brazil, along with a few other countries in Asia and South America, and one is at the point of achieving really substantial progress after all. But on the fourth hand, when you look at U.S. politics (plus that in lots of other countries, e.g., China) and consider as well the weakness of the purely selfish case for cooperating to solve the prisoner's dilemma if everyone is acting unilaterally, the logical conclusion is that we are going to boil.

Full post as published by Start Making Sense on March 16, 2010 (boomark / email).