Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account

Max Franks, Ottmar Edenhofer and Kai Lessmann

Environmental & Resource Economics, 2017, vol. 68, issue 3, No 1, 445-472

Abstract: 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: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://link.springer.com/10.1007/s10640-015-9982-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account (2015)
Working Paper: Why Finance Ministers Favor Carbon Taxes, Even if They Do not Take Climate Change into Account (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:enreec:v:68:y:2017:i:3:d:10.1007_s10640-015-9982-1

Ordering information: This journal article can be ordered from
http://www.springer. ... al/journal/10640/PS2

DOI: 10.1007/s10640-015-9982-1

Access Statistics for this article

Environmental & Resource Economics is currently edited by Ian J. Bateman

More articles in Environmental & Resource Economics from Springer, European Association of Environmental and Resource Economists Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().