A Comparison of Alternative Pricing Scheme for Reducing Worldwide Carbon Emissions

Abstract

In this paper, we derive several alternative pricing schemes to allocate worldwide taxation burden to reduce carbon emissions. We compare traditional allocation schemes with an optimal Ramsey pricing by applying the outcome of modeling heterogeneous consumer behavior across countries. Using empirical estimations of household behavior, we compute demand elasticity values for the 106 leading countries in the world, which constitute around 90% of total world energy consumption and carbon emissions for 2014. We calculate country-specific shares of the global cost of carbon emissions reduction, comparing alternative taxation options: a uniform tax scheme, an equitable tax scheme and a Ramsey pricing scheme, applied to the household sector of all countries worldwide. Our results show the relative welfare impact of different options, revealing that the optimal pricing scheme can improve world welfare and promote a reduction in total emissions.