The economics of the CDM levy: revenue potential, tax incidence and distortionary effects

Sam Fankhauser (), Nat Martin and Stephen Prichard

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: A levy on the Clean Development Mechanism and other carbon trading schemes is a potential source of finance for climate change adaptation. An adaptation levy of 2 percent is currently imposed on all CDM transactions which could raise around $500 million between now and 2012. This paper analyses the scope for raising further adaptation finance from the CDM, the economic costs (deadweight loss) of such a measure and the incidence of the levy, that is, the economic burden the levy would impose on the buyers and sellers of credits. We find that a levy of 2 percent could raise up to $2 billion a year in 2020 if there are no restrictions on demand. This could rise to $10 billion for a 10 percent tax. Restrictions on credit demand (called supplementarity limits, the requirement that most emission abatement should happen domestically) curtail trade volumes and consequently tax revenues. They also alter the economic impact of the CDM levy. Without supplementarity restrictions sellers (developing countries) bear two-thirds of the cost of the tax. If there are supplementarity limits they can pass on the tax burden to buyers (developed countries) more or less in full. Without supplementarity restrictions the distortionary effect of the levy (its deadweight loss) rises sharply with the tax rate. With them the deadweight loss is close to zero.

Keywords: Clean Development Mechanism; adaptation; CDM levy; adaptation finance (search for similar items in EconPapers)
JEL-codes: H23 Q50 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2009-05-26
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http://eprints.lse.ac.uk/37604/ Open access version. (application/pdf)

Related works:
Journal Article: The economics of the CDM levy: Revenue potential, tax incidence and distortionary effects (2010)
Working Paper: The economics of the CDM levy: Revenue potential, tax incidence and distortionary effects (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:37604

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