The French president Nicolas Sarkozy has announced last Thursday his decision to set a carbon tax at 17euros per ton of carbons emissions. When it will come into effect next year, France will be the largest economy to levy such a tax. And this initiative deserves much praise.
To those who might fear that the tax will be an unjust burden for poor households who cannot afford to live inside the cities and need to take their car to go to work every day , Sarkozy has mentioned that the tax would be offset by some income tax reductions for poorer households, or special “green cheques” for those who are below the income taxation thresholds.
Sarkozy has also renewed his call for a European carbon tax on imports. And that too, is justified.
To those who argue that raising such a tariff would promote protecionnism at a time where all efforts should be put on stimulating trade, the WTO has looked at the issue and concluded that it is legal, and economically efficient, because carbon tariffs are essentially a tax on consumers, to collect it on imported goods as well as domestic production. As Krugman says in his blog, “The economics say that we should make consumers pay a price for any carbon emitted in producing the goods they consume, wherever produced, which implies a carbon tariff if the goods are produced in a country without its own carbon-emissions regime”. So a European carbon tax on imports makes sense.
But, however encouraging Sarkozy’s proposals are, they might not be enough…
By “not enough” I don’t mean that the rate decided for the tax is too low. Of course some ardent environmentalists advocate for a higher rate (though Sarkozy has already increased it with respect to the 14 euros per ton announced by French Prime Minister François Fillon in early September) but that’s not the point.
The real issue is that a carbon tax might need to be complemented by another instrument. In a forthcoming paper, Acemoglu, Aghion, Bursztyn and Hemous show that, although carbon taxes discourage polluting activities and make clean research more profitable, ” sole reliance on carbon tax would cause excessive production distortions in the short run”. Optimal regulation involves, in addition to a carbon tax, the use of a profit tax on what they call the “dirty” sector. (to see their paper entitled “the Environment and directed technical change” please click here)
We hope that this idea of a double taxation, both on input and on “dirty” profit, will find some echo at the Copenhagen Climate Conference next December.
