Should the Carbon Price Be the Same in All Countries?

Abstract

International di¤erences in fuel taxation are huge, and may be justi…ed by different local negative externalities that taxes must correct, as well as by di¤erent preferences for public spending. In this context, should a worldwide uniform carbon tax be added to these local taxes to correct the global warming externality? We address this question in a second best framework a la Ramsey, where public goods have to be …nanced through distortionary taxation and the cost of public funds has to be weighted against the utility of public goods. We show that when lump-sum transfers between countries are allowed for, the second best tax on the polluting good may be decomposed into three parts: one, country-speci…c, dealing with the local negative externality, a second one, country-speci…c, dealing with the cost of levying public funds, and a third one, global, dealing with the global externality and which can be interpreted as the carbon price. Our main contribution is to show that the uniformity of the carbon price should still hold in this second best framework. Nevertheless, if lump-sum transfers between governments are impossible to implement, international di¤erentiation of the carbon price is the only way to take care of equity concerns. keywords: carbon price, second best, Pigovian taxation