Carbon Taxes: Many Strengths but Key Weaknesses

There seems to be a consensus among economists in support of a carbon tax for addressing the costly implications of carbon dioxide emissions for the global climate. However, past international agreements on climate change instead specify caps on emissions (a quantity target) for each country. The aim of this paper is to explore several reasons why use of such quantity targets could dominate use of a carbon tax. For one, if a country were to impose a carbon tax at a rate high enough to correct for global externalities, this rate would far exceed the tax rate that would be in any given country’s own self-interest. The result is a strong incentive to make use of a variety of other domestic government policies to encourage greater emissions, undercutting the intended abatement under a carbon tax. A quantity target instead by construction caps emissions. Second, the paper argues that a quantity target can better ensure that global warming remains below 2°C above preindustrial levels, given the uncertainties faced regarding the response to any given carbon-tax rate. Third, the set of quantity targets set for each country can more flexibly be adjusted to ensure that most all countries benefit from participating in a global accord while still allowing efficient patterns of abatement by giving countries credit for cross-border abatement efforts.