Effectiveness of Carbon Tax on Per Capita CO2 Rates

2029 words (8 pages) Essay in Environmental Studies

18/05/20 Environmental Studies Reference this

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Has the carbon tax implemented been effective on reducing per capita CO2?

Using Synthetic Control Method

 

1. Introduction

Nowadays, global warming is an incontrovertible fact and its negative effects on our lives are becoming a serious threat. The greatest greenhouse gas is CO2 and its density is increasing largely due to fossil fuel consumption. Faced with the climate change challenge, the attempt to find a way-out for diminishing CO2 emissions is inevitable.

Various policies have been implemented to decrease CO2 emissions, including emission standards, emissions trading systems, and tax carbon. Amongst these policies, carbon tax is often recommended by economists and international organizations (EEA, 1996).

To decline the consumption of fossil fuel and carbon emissions, carbon tax is set on fossil fuels and related products such as oil, gas, jet fuel, and coal. Carbon tax can encourage the use of substitutes of fuel products and hence it can change energy production and consumption structure. Otherwise stated, carbon tax encourages investment in energy efficiency improvement and energy saving. It also affects consumption and investment behaviours via the redistributing of the collected carbon tax revenue (Lin and Li, 2011).

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Notwithstanding, carbon tax unavoidably has its own disadvantages. In the short term, carbon tax can increase the prices of related products, raise the production costs and impose negative effects on economic growth. Essentially, the final effect of carbon tax is uncertain. The producers may transfer increased costs to consumers through higher prices. In other words, higher price elasticities cause carbon tax costs not to transfer to consumers and to reduce its effectiveness.

Indeed, carbon tax revenue should be returned to producers to reduce income tax or to subsidize development of technology. Hence if the revenues from carbon tax are not redistributed, carbon tax will impose a higher cost on polluters, which might decline its social acceptance (Baranzini et al., 2000). In fact, carbon tax revenue is often absorbed into the governments’ budget (Lin and Li, 2011).

Above and beyond, if developing countries do not take responsibility for CO2 mitigation, implementation of carbon tax in developed countries will lead to the immigration of carbon intensity industries to developing countries with liberal environmental control policies. Consequently, the carbon leakage problem arises (Lin and Li, 2011). Moreover, developed countries tend to impose carbon tariffs on developing countries to maintain the competitiveness of domestic industries and consider carbon tariffs as a new way of supporting trade (Lin and Li, 2011). Thus, the question of how to benefit from the advantages and avoid the disadvantages of carbon taxation is a serious concern of policymakers.

As shown in Table 1, 25 countries have imposed the carbon tax policy by 2018, and 3 countries Argentina, Singapore, and South Africa put carbon tax on the agenda for 2019. The countries which imposed the carbon tax include Australia, Chile, Colombia, Denmark, Estonia, Finland, France, Iceland, Ireland, Japan, Kazakhstan, Sought Korea, Latvia, Liechtenstein, Mexico, New Zealand, Norway, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, UK, and Ukraine. Furthermore, a common property of their implementation is an exemption and tax relief for industries with high energy consumption (Ekins and Speck, 1999). Nonetheless, during recent years, the upsurge of energy prices and the serious issue of energy security, and the negative effects of CO2 emission have forced other countries to put carbon tax on the agenda.

These raise a questions. Does carbon tax have affected CO2 emission reduction? If so, how significant are the affects?

Table 1. Carbon taxes around the world

Country

Year of Introduction

 Tax rate (US$ / tCO2)

Australia

2012

NA

Chile

2017

5

Colombia

2017

6

Denmark

1992

25 to 29

Estonia

2000

2

Finland

1990

77

France

2014

55

Iceland

2010

36

Ireland

2010

25

Japan

2012

3

Kazakhstan

2013

NA

Korea

2015

21

Latvia

2004

6

Liechtenstein

2008

101

Mexico

2014

0.8 to 3

New Zealand

2008

15

Norway

1991

4 to 64

Poland

1990

0.8

Portugal

2015

8

Slovenia

1996

21

Spain

2014

25

Sweden

1991

139

Switzerland

2008

8 to 101

UK

2013

25

Ukraine

2011

0.02

Source: World Bank, 2018

2. Literature

The theoretical underpinning of carbon tax is the Pigouvian tax. The Pigouvian tax is a tax that is imposed on any commodity that has negative externalities. In fact, the purpose of the Pigouvian tax is to equalize the price of the commodity with the social marginal cost.

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Manne and Richels (1990) besides Whalley and Wigle (1991) estimated the impacts of carbon tax on global CO2 emissions, and all their results revealed significant mitigation effects of carbon tax in spite of the different settings of tax rates.

Symons et al. (1994) studied the scenarios of levying carbon tax in the UK, and their results showed that carbon taxes would impact the price of fossil fuels and consequently has an effect on the final demand which determines CO2 emissions.

Gotos (1995) results suggested that with a carbon tax rate of $200 per ton of CO2, CO2 emissions in 2010 can be retained at 1990 levels, with only a 0.1% of GDP loss

Aasness et al. (1996) concluded that when CO2 emissions are taxed at $ 65 per ton, Norway’s CO2 emissions in 2020 can be maintained at the 1989 level, whereas the tax rate should be increased to $200 per ton of CO2 to obtain a 10% decrease in the CO2 emissions in 2020 relative to the 1989 level.

Nakata and Lamont (2001) applied the partial equilibrium approach and concluded that energy and carbon taxes would reduce CO2 emissions to a proposed target, whereas carbon taxes cause a shift in resources used from coal to gas.

Floros and Vlachou (2005) studied the manufacturing industry in Greece, they indicated that when manufacturing industry is taxed at $50 per ton of carbon, the CO2 emissions can be diminished by 17.6% compared to the 1998 level; what is more, they concluded that carbon tax could lead manufacturing industries to more use of natural gas and renewable energy and to reduce CO2 emissions.

Wissema and Dellink (2007) indicated that imposing carbon energy tax of 10–15 Euros per ton of CO2 in Ireland could decrease its energy related CO2 emissions by 25.8% compared with the 1998 level, and it could also encourage the development of renewable energy.

Lu et al. (2010) used the dynamic general equilibrium model to simulate the effects of carbon tax on the macroeconomy of China, and the results implied that carbon tax could reduce the carbon emissions which is effective with limited reduction to GDP. For instance, carbon tax at 300 Yuan per ton of CO2 could diminish 17.45% of carbon emissions with only a 1.1% decrease in GNP.

Nevertheless, some other studies results indicate a minimal effect of carbon tax on CO2 mitigation. Bolin’s (1998) research has shown that in Sweden the effects of carbon tax on CO2 emissions vary in different sectors. In particular, the impact on the transport sector was significant, whereas in the industrial sector, carbon tax did not reduce natural gas and oil consumption owing to the much lower carbon tax rate. Overall, the carbon tax policy in Sweden has reduced carbon CO2 emissions by about 0.5 to 1.5 million tonnes.

Lin and Li (2011) comprehensively surveyed the mitigation effects of carbon tax in five countries, Denmark, Finland, Sweden, Netherlands, and Norway by using the method of difference-in-difference (DID). Their results showed that in Finland carbon tax imposed a significant and negative impact on CO2 emissions. In the meantime, the effects of carbon tax in Denmark, Sweden and Netherlands are negative but not significant. They concluded that in these countries the mitigation effects of carbon tax are weakened as a result of the tax exemption policies on some energy-intensive industries.

In fact, most of existing studies on carbon tax have carried out the simulation in different scenarios and set uniform tax rates for all sectors; only limited studies have used empirical analysis on the effects of carbon tax. Hence, the true impact of carbon taxation on CO2 emission reductions is still controversial. More study is needed, especially a comprehensively study in all countries that have enacted the carbon tax policy.

 

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