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Should environmental taxes be refunded?

Can refunding or earmarking of the revenues help make the taxes more palatable?

There is so much resistance to taxes. Yellow vests, industrial lobbyists and the silent but powerful voters…

Can refunding or earmarking of the revenues help make the taxes more palatable?

Hagem, Hoel and I have very recently, on September 25th, published a paper.

This paper delves into the topic of the widespread resistance to environmental taxation (such as carbon taxes) around the world, and presents a potential fix to this issue. There is strong theoretical support among economists for a “Pigouvian” carbon tax that raises the price of emissions so that they actually include the costs that they incur on the world. In practice however, when such taxes are implemented they are often too low to lead to the intended emission reductions. Reasons for this include the fear of losing competitiveness (job losses), strong lobbying by emitting industries, and resistance to giving money to the state for practical, distributional, pragmatic or ideological reasons. To make taxation politically feasible, a potential solution might be to earmark or refund tax revenues. Previous research supports the idea that refunding environmental tax revenues in various ways can lead to less resistance to taxation. Scandinavia has some interesting schemes for industrial pollutants (NOX) that we have analyzed.

This paper analyses 2 kinds of tax refunding to industries: in proportion to OUTPUT or ABATEMENT.

Refunding in proportion to Output (OBR, which Sweden has for NOx) or in proportion to abatement Expenditure (EBR) – which Norway has. We also model the mixture of both approaches. The paper find that the OBR approach makes a very high pollution tax politically feasible. The EBR policy actually makes a really low pollution tax very effective by using refunds to subsidize abatement. In effect it becomes a combined tax and subsidy. Furthermore, we find that low polluters prefer the OBR system, while high polluters often favor EBR. The mixture of both allows for achievement of both abatement and output reduction targets.

Regulators need different amounts of information depending on the approach. We note that the OBR system needs accurate information on output, which may be susceptible to manipulation. EBR on the other hand, requires information on purchasing costs and costs of the abatement technology. Herein lies opportunities for firms to exploit information asymmetries to extract information rents, which regulators should be wary of. The main take away from this paper is offering an alternative to standard taxation that, while not being technically efficient, can be politically palatable.

(If you are wondering which is better — it turns out to be a bit complex, so read the paper…)

Sincerely,

Ministry of Finance hosts workshop on Carbon Taxation

On October 3-4th, the Swedish Ministry of Finance hosted a workshop on carbon taxation with participants from a large number of finance ministries in countries that have, or are considering implementing a carbon tax. The workshop was held within the framework of the Coalition of Finance Ministers for Climate Action, a new coalition launched in April 2019 aimed at boosting collective action on climate change. The topic of the workshop was to address key questions that arise when considering carbon taxation, and to increase the understanding of how an efficient carbon tax can work in different national contexts. The workshop was inaugurated by Magdalena Andersson, Swedish Minister of Finance who emphasized that the time is ripe for this initiative and that this Swedish initiative has already led to participation in the coalition by more than thirty countries across the World. Find the Ministry of Finance’s press release here.

Thomas Sterner contributed with a lecture on the need for complementary policy measures to enhance the impact of carbon taxation. Thomas spoke of how carbon taxes can be efficient tools to reduce emissions, but for the tax to reach its full potential, policymakers need to consider the context in which the tax is implemented and to complement it with additional measures to improve the effectiveness and acceptance. In addition to creating a better understanding of how to design optimal carbon taxes, the workshop also presented an opportunity to spread the word about the initiative on carbon pricing in developing countries taken by Thomas and the EfD. Many of the participants from low and middle-income countries expressed an interest in the EfD’s work on carbon taxes, which will be one of the highlights at the EfD’s annual meeting in Bogotá in November.

New Talk on Nuclear Power

Thomas Sterner recently held a talk on the role of nuclear power in the transition to a fossil free society and participated in a panel debate on the subject at Studieförbundet Näringsliv och Samhälle, Stockholm. See video below (Swedish only). Sterner also followed up the debate with an opinion piece in the daily newspaper Göteborgs Posten.

SOS

“Earth Day will celebrate its 50th anniversary next year. It shares the mix of success and failure so characteristic of the environment movement. It attracts great attention, helps educate and channel popular interest but we must admit: not enough is being done. Many large scale environmental issues are not only unresolved but deteriorating. This year’s theme “Protecting Our Species” is no exception: the problem is getting much media attention but we are in fact in the midst of the World’s Sixth mass extinction. We are taking the liberty of renaming the theme “Save our Species” (SOS). “

New blog post in Nature Research Blog by Alexandre Antonelli and Thomas Sterner is now posted. Find the full post here.

Policy design for the Anthropocene

It all started with a workshop here in Gothenburg. Now we have a published article in Nature Sustainability. The article is featured on the cover and it can be found here. Monica Contestabile has written an excellent editorial on the subject and Thomas Sterner has written a “behind the paper” blog post. The School of Business, Economics and Law’s press release can be found here.

Picture from the workshop 2016-12-08.

Some other media coverage on the article includes:

”Forskare: Det här är bästa skatten för miljön”. Interview of Thomas sterner by Jesper Vighagen for SVT Nyheter. 2019-01-17.

”New policy design needed to tackle global environmental threat” in Sience Daily. 2019-01-11.

”Styrmedel för en hållbar värld” by Kerstin Lundell in Miljö & Utveckling. 2019-01-18.

”Miljöproblem måste analyseras tillsammans” by Karin Montgomery in EXTRAKT. 2019-01-14.

”Forskare: Så får vi bättre miljöpolitiska lösningar” in Syre. 2019-01-25.

EFD blog post by Gernot Wagner. 2019-05-11.

“Planetary Boundaries and the Anthropocene” by Thomas Sterner and Gernot Wagner in Resources for the Future Magazine. 2019-05-16.