Carbon Taxes, Climate Change, and Sustainable Development Tariq Banuri Stockholm Environment Institute June 2008

Economics of Climate Policy Pigovian (Economists’ choice): carbon tax Coasian (Kyoto option) property rights: cap and trade system Keynesian, or the Investment option Relevant Factors: –Scale/ timing –Policy credibility –Development impact

Other Instruments Institutional Development –IRENA (AOSIS proposal 1997) –Feed in Tariff approach Investment in Renewables Financing through other global taxes –Tobin Tax (Epstein-Gelbspan proposal) –Air travel tax –Progressive global tax (Baer et al) –“Excess” emissions penalty (Brazilian Proposal for Kyoto)

Pros and Cons of Cabon Tax Pro –Internalization of externalities –Revenue generation (but contrary to ecotaxation conception) –Discouragement of rent seeking Con –Uncertainty (how high a tax is needed?) –Equity impact, Development impact –Tinbergen critique (tools and goals) –Dual pricing and institutions

Impact of $100/tCO 2 ($367/tC) TypeImpactPercent Impact Petroleum ($ per gallon)120-40% Natural Gas ($ per 000cft) % Coal ($ per ton) % Electricity (cents per kWh) Old Generators Gas Petroleum Coal New CCGT Coal Gasification % 99% % 48% %

Implications for Development Balance of payments: oil imports, impact of global recession on exports Fiscal Deficit: Tariff revenue, subsidies to low income households, recession and revenue, welfare spending Inflation: Energy prices, exchange rate depreciation, budget deficit Growth: Aggregate demand, shift of investment to energy, welfare costs

The Development Crises 1.Traditional development and MDGs –Solution: conventional financial flows 2.The impact of climate change –Solution: Financial and support for adaptation 3.Impact of OECD climate policies (e.g., carbon tax) –Solution: Policy coherence in North 4.Impact of own climate policies (especially energy) –Solution: New and additional resources for mitigation and adaptation 5.The growth conundrum: Has the age of growth come to an end?

Stern: Stabilization Trajectories

Emission Trajectories for 450 ppm 80% global reductions by % by 2050 in the North What’s left for the South? What kind of climate regime can make this possible?

An Alternative Conception

Emissions and Income Source: World Bank (1998); Marland, et al. (1998).

The Role of Energy Main difference between rich and poor countries Strongly correlated with HD indicators Developing countries need to expand electricity and transport infrastructure three to four times to reach basic needs goals Expansion is constrained not by demand (efficiency, population) but by supply (investment capacity). Over 75% emissions from the energy sector Projected developing country energy growth (3 to 5%) means more emissions despite rising energy efficiency.

Developing Country Energy Deficit OECD ~5.1~5.6~6.9 EIT ~1.0~1.1~1.8 ~3.64.7~9 World ~ Developing Countries Energy Consumption per capita

Example: Energy Market Electricity to low and middle income subsidized (3-6 cents per kWh); also subsidy on natural gas Low taxes on petroleum products, especially diesel and kerosene, compensation for global price increases Incentives for alternative generation: levelized tariffs across time (20 years) and sources. Levelized tariffs for distributors Significant suppressed demand (brown outs, limited access) Rising prices leading to resistance and inflation

Options Carbon taxes and cap and trade can lead to higher prices with cascading impacts, and will need compensating policies Cap and trade: need investment in institutions to benefit from market opportunities Investment option: public supported investment program in renewables, subsidized as needed in line with welfare implications, but will need global financing