Carbon Tax as Double Dividend?

An often invoked (and controversially debated) proposition in environmental economics is that it would be better to alleviate the pressure from “distortionary” taxes (especially income taxes) and switch the burden to environmental taxation – e.g., a carbon tax. This sounds very reasonable – why should we tax what we want more of (labour, income), when we can tax what we want less of (e.g., pollution). This is also known under the name of a “double dividend” (dividend 1: the environmental impact; dividend 2: removal of distortions, especially in the labour market). But, reasonable and tempting as it sounds, this approach has its downsides. The main two are: the aspect of “distortionarity”, and the tradeoff between efficiency and revenue. Continue reading

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Discounting in the Economics of Climate Change

It was frequently argued that the discount rate is the most important single figure in the economics of climate change. Due to this figure we observe large differences in policy recommendation between different economists of climate change (most notably, the choice of the discount rate determines the difference in what William Nordhaus on the one hand, and Nicholas Stern, on the other, call for). There is no concrete recommendation in standard economics how to discount long run benefits and losses. But it is clear that, if you want to compare benefits from the future with costs today, you need a discount rate. So far agreement prevails. The problem is the definition (or: choice) of the “right” discount rate, which involves economic forecasts as well as ethical decisions. In the following I shall present an overview about the main arguments in the discussion. Continue reading

Why Climate Scientists and Economists Cannot Agree

Most climate scientists are calling for immediate and decisive action of the global community needed if we want to prevent global warming from devastating our world. Since they are people who have dealt with the subject professionally for years, there is no reason not to believe them. Nevertheless, distinguished economists who work on climate change (e.g. William Nordhaus or Richard Tol) are calling to slow down, claiming that immediate and decisive action not only is not necessary – it could be harmful to the world economy as well. Whom should one trust? And why the differences? Continue reading