A lesson from this section is that, despite their great diversity, the findings
of empirical models confirm the theoretical diagnosis. Revenue-raising instruments
such as carbon taxes or auctioned emissions permits are, if properly utilized,
the most efficient instrument for minimizing the aggregate welfare losses (or
maximizing the welfare gains) of climate policies.
It should be noted however, that, even if the only one available study for China suggests that opportunities for revenue recycling exist in developing countries, no swapping generalization can be made at this stage. While theoretical modelling and empirical evidence suggest that such opportunities are available in many OECD countries, developing countries in many cases start from a different fiscal baseline (e.g., fewer entrenched distortionary payroll taxes). They also have other potentially underused tax bases that may become more developed as their economies grow at rates that typically exceed growth rates in OECD countries. In developing countries, direct welfare losses associated with a carbon tax may, therefore, reduce opportunities for mitigation within the fiscal reform policy envelope. At this stage, however, insufficient evidence exists either to confirm or to substantiate these hypotheses; studies to date have mainly concentrated on developed countries and their conclusions may not be directly transferable.
Beyond controversies about the capacity of government to warrant fiscal neutrality,
that is the fact that the total fiscal burden remains unchanged, the adoption
of carbon taxes or auctioned permits confronts the fact that their enforcement
must be done in the heterogeneity of the real world, and can have very significant
Economic analysis can define the compensation necessary to offset these negative
distributional effects but, in the real world, winners cannot (or are not willing
to) compensate losers. This is especially relevant when the losers suffer heavy
impacts and the winners enjoy only marginal gains, which leads to the so-called
political mobilization bias (Olson, 1965; Keohane and Nye, 1998) when the losers
are more ready to organize a lobbying and incur mobilization costs than the
winners (Williamson, 1996). Under such circumstances, policies yielding the
largest aggregate net benefits may prove very difficult to enforce. Economic
models provide no answer to this issue, but can try to frame the debate by providing
the stakeholders with appropriate information. This is the objective of Sections
18.104.22.168 and 22.214.171.124.
Other reports in this collection