Optimal Climate Change Tax Policy for Small Open Economies

Abstract

What are the best climate change tax policies for governments with relatively small open economies such as the Canadian one? This chapter assesses recent Canadian government climate change tax policy initiatives, discusses the merits of carbon taxes versus cap and trade solutions then considers the constraints imposed on optimal climate change (or global warming) tax policy by increasing regional and global economic interdependence. The perhaps obvious conclusion is that governments with small open economies should seek collective action solutions to confront climate change challenges: the suggested approach is to develop consensus surrounding the imposition of a global carbon tax with, at least initially, a low rate. In particular, carbon taxes have the virtue of transparency and consistency that responds to concerns set out in the optimal tax and compliance theory literature. An international agreement that focuses on the price of carbon can, at the beginning stages, incorporate regional cap and trade (or other) programs with the aim of ultimately evolving into a global carbon tax.