A Global CO 2 Tax for Sustainable Development ?

The Rio+20 conference in 2012 called for goals of promoting green industries and improving the quality of institutions worldwide. Is a global CO2 tax the best global solution for achieving this twin goal? As most countries in the world are highly corrupt, an adequate regulatory instrument should be able to work in a simple way that does not rely on strong formal institutions for enforcement. We argue that this is the case for a global CO2 tax. A uniform CO2 tax can be introduced as a “painted” energy tax that provides the needed incentive to switch from brown to green industries and minimizes the risk of carbon leakage. The achievement of the specific 2-degree target level is discussed as an example implying huge tax revenues that may be invested in better institutions. In perspective, the idea of having one instrument solving one problem will probably ease forthcoming political discussions and sustainability conferences substantially since the focus is on one issue rather than many.


Introduction
One future main challenge for political decision-makers all over the world is to agree on a common regulatory instrument that may ensure a sustainable development (UN, 1987).20 years after the 1992 Rio conference on sustainability, the focus is again on trade-offs between economic and environmental goals.Two main themes in the Rio+20 conference was how to establish well-functioning institutions and facilitate the growth of green industries (UN, 2011).
Whether institutions are well-functioning or not can be measured by the level of corruption.Corruption is defined as "the misuse of public power for private gain" (Rose-Ackerman, 1999, p. 91).The term "private gain" relates to receiving money or valuable assets, but it may also encompass increases in power or status.Receiving promises of future favors or benefits for relatives and friends can also be considered private gains (Lambsdorff, 2007, p. 16).The strong negative effects of corruption in a society are well documented when it comes to economic growth, health, political legitimacy and the well-being of citizens.Also, corruption hampers the provision of public goods such as increased environmental quality in terms of CO 2 reduction (Svendsen, 2011).
About 85 per cent of the world's population lives in a state that can be described as corrupt, despite a wide understanding that corruption is likely to increase transaction costs, create perverse incentive structures and hamper economic growth (see North, 1990;Meon & Sekkat, 2005).Basically, the enforcement problem is worsened when national authorities are corrupt: The higher the corruption level in a country, the higher the risk of cheating because bribing the authority is easier for the emitter.Corruption levels vary considerably across countries.Overall, a north-south divide exists: The further south, the more corruption according to Transparency International (2013).Even if sanctions are formally in place, they will not be imposed in corrupt countries.The risk of corruption and cheating is a ticking bomb under most regulatory instruments.
As argued by Oates and Schwab (1988), enforcement systems rely on precise monitoring and well-functioning sanction mechanisms, typically based on the economic incentive of fines.If these two conditions are not met because of corruption, sources may find cheating profitable.Furthermore, local authorities may have strong free-rider incentives to protect their "own" firms against strict enforcement.Overall, local firms may be given substantial room for cheating (Daugbjerg & Svendsen, 2003).
The traditional way of controlling pollution has been regulation in the form of standards or "Command and Control (CAC)" (Daugbjerg & Svendsen, 2001).Setting CO 2 standards for individual firms implies that producers can violate their individual standards by bribing the regulating authority.The same argument holds for emission trading systems.The only difference between standards and emission trading is that the producer in the latter case has been granted the property right to freely trade emission allowances in the market (Svendsen, 1998).Even worse is the instrument of subsidization.In the presence of corruption, it is possible to receive excessive subsidies from the regulator without actually reducing CO 2 units and then split the profits with the corrupt bureaucrats and/or politicians in question.
What this paper adds to the literature is the suggestion that a global CO 2 tax is the most likely political solution because it can be introduced as a painted energy tax, can dampen the carbon leakage problem and provide the right economic incentives to switch from brown to green industries.A painted energy tax means that a CO 2 tax can be imposed at the central level on fossil fuels according to their CO 2 contents.Next, the resulting tax revenues may be invested in better institutions.We use the case of a specific 2-degree target level as an empirical example showing the substantial size of the tax revenues.
In doing this, the traditional gap between economists and political scientists is bridged.Economists are experts in suggesting optimal solutions to societal problems in economic terms.They tend, however, to forget about the reality of political and administrative friction.In contrast, political scientists tend to focus on institutions and the political and administrative feasibility of a given policy proposal but often forget to take into account the economic benefits and costs from doing so.Producers, for example, will try to increase their profits by actively lobbying for more market protection, typically by establishing different types of market barriers or avoiding costly environmental regulation (see e.g.Tullock, 1967).In this way, the paper is in line with Cropper and Oates (1992).They were the first to point to the need of taking political reality into account when using the standard approaches of environmental economics.
Thus, the main research question is as follows: Can a global CO 2 tax secure the Rio+20 twin goal at the global level?In the following, we argue that one bold but straight forward solution could be to impose a uniform tax on pollution and, in this way, use one instrument to solve one problem (Avi-Yonah & Uhlmann, 2009).A uniform tax simply means that all polluters are taxed at the same level (Pigou, 1920;Kerkhof et al., 2008).Such a single-minded focus in future climate negotiations could lower transaction costs and pave the way for a great leap forward.Furthermore, the revenue from uniform green taxation can be used in productive ways such as improving institutional quality and/or lowering other distortive taxes, for example, income taxes (Daugbjerg & Svendsen, 2001).
The so-called "double dividend" from green taxation increases environmental quality at least-cost and, at the same time, lowers other distortive taxes.See, for example, Siriwardana et al. (2011) on the impact of a carbon tax on the Australian economy.Taxes may, in theory, not be distortive if designed as lump-sum taxes, but such a policy is rarely, if ever, found in reality.Furthermore, green taxation is consistent with the Polluter-Pays-Principle, which is, for example, valid in the EU.This means that the polluter should bear the costs that a given production inflicts on any society within the EU (Svendsen, 2003).
In the following, the gap between the disciplines of economics and political science is bridged by focusing on a CO 2 tax as the best possible economic solution, which is, at the same time, politically and administratively feasible in the global perspective.We do this by first showing how CO 2 taxation works and how it promotes the switch from brown to green industries, thereby increasing the use of renewable energy (Section 2).Carbon leakage has been the Achilles heel of international negotiations, but a uniform CO 2 tax can help solve this problem (Section 3).Then, we provide some estimates on the size of an actual CO 2 tax at the global level for achieving the specific target of a 2-degree level (Section 4).Finally, a conclusion is given (Section 5).

The Tax
At the beginning of the last century, the English economist Arthur C. Pigou (1920) suggested that the introduction of a tax could reduce the substantial problems of smog in London.Pigou showed this by looking at pollution as a negative externality where private costs were lower than the social costs.Therefore, the price of pollution should be included to confront the polluter with a price that reflected the actual marginal social cost.An environmental tax, which was calculated as the difference between the polluter's private marginal cost and the marginal social cost, would thus internalize the externality in the economic calculation of overall society.Pigou's original recommendation is still valid: By imposing a uniform CO 2 tax levied directly on the use of fossil fuels, producers will reduce their pollution to the point where the marginal cost of reducing their CO 2 pollution by an additional unit is equal to the tax rate.The cost of the last unit of CO 2 reduction is therefore the same for all producers.
Figure 1 shows how a Pigou tax works.We can compare the tax solution with a uniform reduction obligation (CAC regulation) where each emitting source will have to reduce the same amount to see the cost efficiency property of a tax.This is done in Figure 1, where we have two emitting sources, A and B, and show their marginal reduction cost curves as and , respectively.Source B has higher reduction costs than source A. Under the CAC regulation, both sources reduce , while under the tax system with tax rate , the high cost source reduces less (and pays the tax for a larger part of its emission), and the low cost source reduces more, denoted by and .In this way, the uniform CO 2 tax allocates reduction in accordance with how costly it is to reduce CO 2 emissions, and therefore, the total cost from regulation is minimized.Moreover, the tax meets the Polluter-Pays-Principle since the sources pay for all their emission compared to the CAC, where this is not the case.

Figure 1. The uniform tax solution
As mentioned, the existence of such a uniform CO 2 tax at the global level would mean that firms would reduce emissions up to the point where the tax rate equals the marginal cost of reducing one extra pollution unit.Therefore, the cost of reducing the last pollution unit would be the same in all firms in all countries, and the carbon leakage problem would be counterbalanced.Moving production from one country to another to avoid CO 2 regulation would no longer pay.The CO 2 tax would be the same in both countries.
Furthermore, a differentiated tax solution would, beside the effect of carbon leakage, not be optimal in economic terms.As long as tax rates are not uniform across countries, the global society can save major costs by having the flexibility of shifting pollution reductions from high-taxed to low-taxed polluters so that all emitters would face one identical tax level only.When marginal reduction costs are the same for all polluters, it no longer pays to shift pollution reduction between different emitters.The firm, however, faces an extra operating cost (Daugbjerg & Svendsen, 2001).We will return to potential political opposition against carbon leakage in Section 3.

The Switch From Brown to Green Industries
How does a global CO 2 tax affect the potential shift from brown (non-renewable fossil fuels) to green industries (renewable energy)? Figure 2 shows what happens in this so-called switch point theory (Brandt & Svendsen, 2006).
The vertical axis measures the cost per unit energy, for example, Mega Watt, produced.The horizontal axis measures time.Marginal costs for energy production based on fossil fuels (coal, oil and gas) rise over time as these sources are exhausted (MC fossil ).Assume for simplicity, that the marginal costs for MW production based on renewable energy are constant at the price of * .Within our interval, we simply expect that, with the existing technology, it is possible to produce one extra unit at the same marginal cost (MC renewable ).In fact, as technology improves over time, it is more likely that marginal costs for renewables will decline rather than stay constant.Given these simplifying assumptions, however, it is cheaper to use fossil fuels rather than renewables as an energy source until some future point in time, * .After the switch point * , renewables become increasingly cheaper compared to fossil fuel-based energy.grown stronger and have more policy impact than national interest groups because of their size and international co-operation, which facilitates, for example, the sharing of lobbying costs (George & Bache, 2001).Multinational firms, strengthened by globalisation, know that they can avoid environmental costs if necessary, for example, by moving production and CO 2 emissions from Germany to China (Svendsen, 2003).

The Specific Target of a 2-Degree Level and the Size of CO 2 Tax
A specific example of sustainability may be found in the case of the 2009 Copenhagen meeting.Here, the international society adopted a target of limiting the increase in the global mean temperature to below 2 degrees Celsius (compared to the 2000 level).According to climate scientists, this target can be re-formulated as not allowing the concentration of CO 2 in the atmosphere to exceed 450 ppm (IPCC, 2009).According to the EU ( 2008), the 450 ppm target is the level of concentration where there is a likelihood of 50 per cent that global warning will not increase more than 2 degrees.
In comparison, the current concentration is about 400 ppm (2013 level), and over the last 10 years, the concentration has increased by 2 ppm per year.Consequently, by an unchanged emission of CO 2 , the 2-degree target will be exceeded in 2037 (IEA, 2011).To make things worse, over the last 10 years, global emission has increased by 2 per cent per year (NOAA, 2012).Therefore, the target might be reached even earlier than 2037.This is in particular problematic since, once exceeded, even a zero-emission situation cannot reverse the amount of CO 2 in the short run because of the slow decay of CO 2 in the atmosphere.
A uniform tax implies that all emitting sources of 2 will be treated equally regardless of process or region and eligible to the same cost of emissions.Nordhaus (2010 and2011) calculates the optimal path of a global carbon price ensuring that the temperature will not exceed the 2-degree mark (see Table 1).Over time, the tax will rise from about $24 in 2015 to $277 in 2105.The implication of this price structure is that global emissions will remain at the 2005 level until 2025.After that, emissions will fall to almost zero in 2055.Note that since global emissions are currently increasing, a continued delay in emissions reduction implies the necessity of a higher carbon price to achieve the 2-degree target.
To put these figures into perspective, in the current EU emission trading system, the price of 1 ton of CO 2 has ranged between 5-15€ (approx.7-20$).Therefore, a tax on CO 2 in 2025 is more than a doubling of that price and should be levied on all emissions.
How will this tax affect different countries, and how are the incentives to reduce emissions through the development and implementation of new and cleaner technology?We illustrate the consequence of a tax for different countries by using the IPAT identity.This identity is given by: Using this identify for CO 2 emissions for a given country, we have that: where we consider Affluence and Technology .Inserting and reorganizing:

≡ •
This equation tells us that per capita emission can be decomposed to economic performance (GDP/capita) and technological level (how much CO 2 is needed to produce one unit of GDP).
For our purposes, we make the IPAT measure country specific and use the following notations.Given emission in country i , and uniform tax rate (measured in $/ton ), the total tax payment (revenue) in country i ( is given by www.ccsen Inserting: In such a t and implem we show th  much CO 2 per capita on average as do citizens in Denmark.The dynamic incentives prevailing in a tax system suggest that technological progress will support energy savings, hence decoupling CO 2 emission from economic growth.As a caveat, part of the Danish reduction in CO 2 might be caused by leakage effects.Such effects will be eliminated in the global uniform tax system.
In case of a progressive increase in the uniform tax over time, as suggested by Nordhaus, we can reinterpret Figure 2.Even if the private cost from using conventional energy does not increase over time because of the increase in CO 2 tax, the cost of using conventional energy also increases, and eventually, the less CO 2 -intensive energy sources will become competitive.
The size of the tax revenue in terms of real value will, however, vary greatly among various regions because of the major difference in wage and labor costs.In the developing countries, for example, the minimum wage could be as low as of one hundredth compared to the developed countries.Therefore, the impact on the profit will not be the same across countries, and one may, in perspective, consider building the global tax based on some universal GHG-emissions indicators that are fair to all countries (Moghaddam et al., 2013).

Conclusion
The Rio+20 conference in 2012 called for better institutions and more green industries.The main question was whether a global CO 2 tax was the best regulatory tool for achieving these goals.Overall, our bold conjecture was that a global CO 2 tax should be applied.Rather than standards, emission trading and subsidies, such a "painted energy tax", could work even in a setting of low-quality institutions.Implementing such a global CO 2 taxation will be relatively easy even when national institutions are of low quality as it can be imposed at the central level according to the CO 2 content in fossil fuels.By doing this, the risk of corruption and cheating is reduced significantly.Concerning the shift from brown to green industries, CO 2 taxation promotes an earlier shift to renewable energy from fossil fuels, thereby promoting a more sustainable production.Furthermore, competitiveness is not ruined when all countries are taxed the same, meaning that the carbon leakage argument applied by producers in international political negotiations is severely weakened.
The 2-degree target level from the 2009 Copenhagen meeting served as an illustrative example where the CO 2 tax had to rise from about $24 in 2015 to $277 in 2105.The increase in the tax rate over time also favors the less CO 2 -emitting technologies, as shown in Figure 2. As the tax rate increases, the strength of such industries in the political area also increases, and hence, more support for an increase in the CO 2 tax can be expected over time, making the tax system a politically feasible solution.
These major tax revenues generated could then be invested thoroughly so that a double dividend would be achieved from improved environmental quality and less distortion elsewhere in the economy.Developing countries with low-quality institutions may, in particular, find CO 2 taxation highly attractive as an easy tool to collect taxes.When CO 2 taxation has been implemented, part of the revenue may be invested in better institutions, for example, by fighting corruption effectively.In perspective, focusing on one instrument as a reply to the Rio call is most likely to grease forthcoming political negotiations on a sustainable future.Complex political negotiations on many issues and many instruments have so far not proven a fruitful way to move forward.