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Combining Carbon Taxation and Offset Payments: A New Approach to Climate Policy in Low-Income Countries

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  • Jon Strand

    (The World Bank)

Abstract

I consider a “low-ambition” (LA) country with no current climate policy, with two sectors. Sector 1 can in principle sell an unlimited amount of carbon offsets to a bloc of “high-ambition” (HA) countries. A condition for access to the right for sector 1 to sell unlimited offsets is that sector 2 of the LA country implements a comprehensive carbon tax. When the two sectors have equal size, and public and private revenues are valued equally by the LA government, a carbon tax in sector 2, equal to the offset price for sector 1, can be incentivized. The HA country bloc then buys offsets from the LA country at a price equaling its carbon externality cost. When sector 1 is larger (smaller) than sector 2, the offset price in sector 1 will be lower (higher) than the carbon tax in sector 2. When public funds are more valuable than private funds to the LA government, the implementable carbon tax is higher, and the optimal offset price lower. The model provides a novel mechanism by which a bloc of HA countries can incentivize LA countries to implement enhanced greenhouse gas mitigation.

Suggested Citation

  • Jon Strand, 2019. "Combining Carbon Taxation and Offset Payments: A New Approach to Climate Policy in Low-Income Countries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 74(3), pages 949-960, November.
    • Handle: RePEc:kap:enreec:v:74:y:2019:i:3:d:10.1007_s10640-018-0305-1
    DOI: 10.1007/s10640-018-0305-1
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    References listed on IDEAS

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    1. David F. Bradford, 2004. "Improving on Kyoto: Greenhouse Gas Control as the Purchase of a Global Public Good," Working Papers 106, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Strand, Jon, 2013. "Strategic climate policy with offsets and incomplete abatement: Carbon taxes versus cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 66(2), pages 202-218.
    3. Larry Karp & Sauleh Siddiqui & Jon Strand, 2016. "Dynamic Climate Policy with Both Strategic and Non-strategic Agents: Taxes Versus Quantities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(1), pages 135-158, September.
    4. Thierry Bréchet & Yann Ménière & Pierre M. Picard, 2016. "The Clean Development Mechanism in a world carbon market," Canadian Journal of Economics, Canadian Economics Association, vol. 49(4), pages 1569-1598, November.
    5. Strand,Jon, 2016. "Assessment of net mitigation in the context of international greenhouse gas emissions control mechanisms," Policy Research Working Paper Series 7594, The World Bank.
    6. Liski, Matti, 2001. "Thin versus Thick CO2 Market," Journal of Environmental Economics and Management, Elsevier, vol. 41(3), pages 295-311, May.
    7. Knut Rosendahl & Jon Strand, 2015. "Emissions Trading with Offset Markets and Free Quota Allocations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 61(2), pages 243-271, June.
    8. Matti Liski & Juha Virrankoski, 2004. "Frictions in Project-Based Supply of Permits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 28(3), pages 347-365, July.
    9. repec:pri:cepsud:96bradford is not listed on IDEAS
    10. David F. Bradford, 2004. "Improving on Kyoto: Greenhouse Gas Control as the Purchase of a Global Public Good," Working Papers 106, Princeton University, Department of Economics, Center for Economic Policy Studies..
    11. Fuhai Hong & Susheng Wang, 2012. "Climate Policy, Learning, and Technology Adoption in Small Countries," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 51(3), pages 391-411, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Paris Agreement; Offset markets; Carbon taxation; Efficient climate agreements;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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