Harmonization of carbon taxes in international climate agreements

Abstract

The use of some kind of carbon tax is often proposed as part of an international climate policy. One possibility could be an international climate agreement requiring a harmonization of domestic carbon taxes. It is shown that there are several practical difficulties with such an agreement, and that it therefore is unlikely that CO2 emissions will be allocated efficiently between countries with this type of agreement. Alternative types of agreements include an international carbon tax, in which the governments of the participating countries pay a tax, in proportion to their CO2 emissions, to an international agency. A very similar arrangement would be to introduce a system of emission permits which are internationally tradeable between governments. Under quite general conditions, agreements of these two types can be designed so that they are both efficient and satisfy whatever distributional objectives one might have. Under both of these systems, the choice of domestic policies could be left to the individual countries. A domestic carbon tax is an obvious policy response from a country participating in an agreement of this type.