Climate Change Forum Questions and Answers

The Question: What is the impact of either system, Carbon Tax or Cap and Trade, on the economies of emerging countries?

The Response:  Dr. David Robinson, who supports “Fee and Dividend” as the mechanism for putting a price on Carbon, responds:

This is a terrific and difficult question because so much depends on the administrative and political conditions in the emerging country. Here are some of the factors to consider:

  1. Emerging countries typically lack the capacity to impose systematic taxes, but a tax on imported fuels is relatively easy to impose. It would be highly unpopular, however and would be regressive in the absence of any redistribution of the revenue.
  2. Cap and trade is more complex to implement, less likely to be blamed on the government and at least as regressive.
  3. Carbon taxation probably provides more reliable revenue to the government of emerging economies.
  4. Countries with kleptocraticies or just weak governments are more likely to create cap and trade systems that are riddled with concessions to favoured groups and to distribute caps to make elite or powerful groups wealthy. A weak taxation system forces  governments to depend on aid, resources revenues and concessions, making the government less accountable to taxpayers and more vulnerable to pressure and corruption.
  5. Getting full coverage with either system would be difficult in most developing of  emerging countries.
  6. Some emerging countries are relying on carbon offsets either for public revenue or as a business for the private sector. My understanding is that offsets have been quite valuable in some cases, but very prone to fraud and exploitation in others.
  7. Access to foreign revenue for offsets does not depend on the local regime: it depends on the rules in the foreign regime, so the question of offsets is largely irrelevant in the choice between carbon fees and cap and trade systems.

My view is that the simplicity of a tax, the fact that it is less subject to manipulation, and the fact that it would tend to strengthen a country’s revenue system make a tax regime preferable.

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