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…)
Thomas Sterner and colleagues have published a Nature Climate Change paper ‘Climate economics support for the UN climate targets’. Link https://rdcu.be/b5AvD
We explore the effect of a number of updates and modifications to the Nobel laureate William Nordhaus’s DICE – model.
We use an alternative damage function that Peter Howard and I published in the journal Environmental and Resource Economics 2 years ago. We also use a carbon cycle based on the FAIR model and update the energy balance model. These changes actually make it possible to emit more carbon before reaching the 2C level. When it comes to discounting, we draw on a new survey of some 170 expert views on the key discounting parameters delta and eta. There are a couple more modifications such as concerning non-CO2 forces and the availability of net negative emission technologies.
With these modifications, limiting global warming to <2C becomes economically optimal. We take a median view of the experts surveyed for discounting, but also with Nordhaus discounting parameters limiting to 2C is optimal due to the other modifications made.
I think this paper may have quite a big impact and hope you will find it interesting. Since I am anResources for the Future ( RFF) fellow I would love to have this somehow “noticed” at RFF. We could retrospectively make it a working paper or perhaps do a blog or something in RESOURCES – in case you are interested and find it appropriate.
It started with that William Nordhaus was awarded the Sveriges Riksbank Prize in Economic Sciences for his DICE model, which concludes that it is economically optimal to limit global warming to 3,5 degrees Celsius. According to the UN Paris Agreement, countries committed to limiting global warming to well below 2 °C and to actively pursue a 1.5 °C limit. These targets are, according to Nordhaus’s model, economically sub-optimal.
In a new article published in Nature Climate Change, Thomas Sterner together with researchers from among others Germany, Norway, USA and the UK show that the UN climate targets may be optimal even in the DICE model when appropriately updated. You can read the article here.
The article has gotten a fair share of attention both in Sweden and internationally, some of the media coverage is listed below.
It is time for the Annual Conference of the European Association Environmental and Resource Economists, this time hosted in Berlin! The conference is organized by Technische Universität Berlin and Humboldt-Universität zu Berlin (HU Berlin). Due to the corona virus outbreak, this years conference is held online. Thomas Sterner participates in a number och policy sessions, paper presentations and plenary sessions aimed at promoting scientific research and collaboration to contribute to the development and application of environmental, climate and resource economics. Read more about the conference and see the program at the conference’s webpage.
Today is the World Ocean Day, celebrated around the world. By working together we can protect and restore our oceans and on world ocean day, people around the world get together and celebrate our blue planet. Together with Håkan Eggert, Thomas Sterner has a new blog post on Nature Sustainability to notice and celebrate this important day. You can read the post here.
It is still too early to draw conclusions about which national Corona pandemic strategies worked, and which did not. There is nevertheless a debate going on about which way is the right to handle it. Sweden’s unusual approach to fighting the pandemic goes against the mainstream and has attracted criticism both from within Sweden, but perhaps more so from other countries which are locking down public life to curb the outbreak. The differences between the Swedish approach and other countries might be overstated but certainly exist. In an article for Fondation Collège de France, Thomas Sterner shares his reflections over the Swedish approach. Read the article here (in French).
Earth Day is turning 50 years this year, celebrated with the theme of “Climate Action”. At the same time the world is in lock-down to avoid the spread of COVID-19 – and the climate debate has become quiet in the pandemic’s tracks. There are however good reasons not to forget the climate as we deal with the current health and economic crises.
New blog post on Nature Sustainability by Thomas Sterner, Thomas Kåberger, Estelle Cantillon and Claude Henry. Find the full post here.
The Swedish Government strives to accomplish a green tax exchange, which means raising environmental taxes in exchange for lowering taxes on income and corporations. The question is how this should be done: which taxes to include, how much to exchange and how to use the tax revenues? Against this backdrop, Thomas Sterner together with 11 other prominent researchers, business profiles and politicians was invited to share his ideas in a new anthology by the green think tank Fores. The anthology was launched during a live stream webinar where the contributors had the opportunity to present and discuss their ideas. You find the publication here and watch the webinar here.