1. Introduction.   Carbon taxes and, more generally, taxes on greenhouse gas emissions, are a widely advocated means of reducing such emissions to address anthropogenic climate change – see, for example, Metcalf and Weisbach (2009).  I examine the positive and normative effects of a generic ‘carbon’ tax that covers the various greenhouse gases, with respect to its tax incidence and welfare effects including ‘double-dividend’ arguments.   I also consider the appropriate choice of carbon tax base – issues of the breadth of the tax are considered as well as whether it should be levied on a ‘destination’ or ‘origin’ basis in an open economy. Then I provide an evaluation of the case for a carbon tax rather than an emissions trading scheme. It is clear that although the analysis focuses on design issues for carbon taxes that many of the same issues arise with respect to emission trading schemes.  The discussion closes with conclusions and final remarks.

The advantages of using economic instruments over direct regulations to manage external costs are well-known and not discussed at length here.  The objectives of public environmental policy should not only be to restrict socially damaging carbon pollutions but, also, to do this at minimum cost, where cost includes the cost impacts of the tax and the costs of abating the pollution.  This cost information is often best assessed by the individual firms in an economy who can often make more economically efficient adjustments to priced carbon emissions than could a planner who sought to regulate these firms but who was unaware of their specific costs.  

2. Tax incidence and welfare consequences.  Carbon taxes on the burning of fossil fuels are typically motivated as measures to internalize the climate change externalities associated with carbon emissions.  Consider their role in a stylized market where a good – for specificity take the empirically-important case of ‘electricity’ – is produced using a mix of more or less carbon-intensive technologies and then sold to consumers and firms.  Suppose the market is competitive.

If the demand for electricity is D and, given the marginal private production costs (MPC) and the absence of any carbon tax or other restriction on carbon emissions, quantity E₁ of electricity is sold at price P₁.  As this electricity is produced, marginal social costs (MSC) arise comprising the MPC incurred by resident producers plus the external social costs, borne both by residents of the economy and by those living elsewhere in the world. The pollutants are an externality but they are also a global ‘public bad’ because the CO₂ released into the earth’s atmosphere as a consequence of burning fossil fuels contributes towards damaging climate change.  These social costs are difficult to assess accurately because it is known that the emissions potentially pose the threat of a catastrophic non-marginal social costs (Weitzman, 2009). Yohe et al (2007) provide an estimated average of marginal social cost of carbon at $43/tC but this estimate has the large standard deviation of $83.  These substantial uncertainties motivate some to determine taxes that will meet carbon reduction targets although there then emerge uncertainties about how various tax rates will impact on emissions.

A consequence of the external costs is that, from the viewpoint of optimizing the difference between local private benefits and global costs, electricity production E₁ is socially excessive and is sold at an excessively low price P₁.  A measure of the deadweight losses associated with this excessive production is the triangle marked DWB.

The classical Pigovian approach to eliminating these deadweight losses is to levy a tax T on electricity production which raises the PMC experienced by electricity producers to MSC.  This increases prices from P₁ to P* = P₁+T and reduces electricity production to E*. Imposing this tax provides a welfare gain to the society in the sense that the global deadweight losses, DWL, are eliminated.

It is not necessary to suppose that different production technologies here have the same carbon emissions intensities so that they therefore face the same emission costs.  Firms with CO₂ abatement technologies will abate to the point where marginal abatement costs equal the optimal emission tax so that, across firms who continue to produce, marginal abatement costs will be equated guaranteeing economic efficiency – the socially desired level of output E* will be met at minimum cost.  Firms without abatement technologies will go out of business if their output is redundant to demands met at the tax-inclusive price by lower cost producers.

Seven comments:

(i)  For this analysis to plausibly describe the gains from an activist tax policy, residents of the society considered must value the gains enjoyed by the world as a whole from carbon pollution reduction.  In short, tax revenue gains from such a policy are not by themselves sufficient to compensate for the reduced production and consumption surpluses experienced as a consequence of the tax – apart from the environmental gains there is an excess burden from this tax.  The reduction in unpaid social costs as a consequence of the tax however exceeds the excess of surpluses lost over revenue gained if and only if residents attach positive value to the deadweight losses DWL that are experienced globally.

This is simply recognizing that the external costs here accrue to residents and, for a small open economy, primarily to the rest-of-the-world.  To include them in a particular country’s social welfare function requires first the assumption that the CO₂ emissions are in fact damaging. It also supposes either some degree of altruism towards the world at large or perhaps the objective of adherence to a target specified by a global agreement that seeks to address global emissions.

Once these external costs are recognized by citizens the externality tax itself implies no deadweight losses – it instead reduces socially damaging behavior to efficient levels.   Therefore revenues can be used to cut other taxes which are distortionary providing what, at first sight seem to be, a ‘double dividend’ benefit as discussed below.

(ii) In a closed economy it makes no difference, from the viewpoint of tax incidence, whether the tax on electricity consumption is levied on consumers or producers.  Then the division of the burden of the tax between the economy’s producers and consumers depends on the price elasticities of demand and supply for electricity not on the nominal incidence of the tax.  The effective incidence of the tax is borne primarily by electricity producers if the absolute value of the demand for electricity is much more elastic than supply – this is likely to be the situation in the short-run – whereas it is borne primarily by consumers in terms of higher prices if supply elasticities are much greater than the absolute value of demand elasticities as is likely longer-term.

The relative size of these elasticities is an important issue in determining who should receive income or other compensations for the impact of the tax.  Again if demand is relatively inelastic then compensations should be directed to consumers whereas, if supply is relatively inelastic, it is this sector that suffers most from the tax impact and hence suppliers might plausibly be considered for compensation.

The irrelevance of the nominal incidence of a tax breaks down in an open economy where consumption and production of outputs may arise outside an economy. This is discussed below.

(iii) Longer-term supply effects on supply will be more pronounced than short-term effects.  Longer-term there will be switches between existing technologies towards those which are less carbon polluting and incentives to innovate new low carbon intensity technologies.  Indeed the current and future tax-inclusive prices of output delivered using carbon-intensive technologies will be a key informational requirement in establishing the commercial viability of new long-lived technologies. The competitiveness of renewable technologies and nuclear power as well as carbon capture and storage technologies becomes easier to assess once carbon taxes are in place.

Longer-term both supply adjustments and demand shifts will help an economy adjust away from carbon-intensive technologies.

(iv) Capital stocks used in activities, such as electricity generation, are long-lived creating a time-consistency issue for those designing carbon taxes in market economists with populist elected politicians.   In short, firms using such capital stocks are subject to ‘hold-up’ by these politicians who, they will understand,  have incentives to first introduce carbon taxes to drive the commercialization of low-carbon-intensity technologies and then, once this is done and shifts toward low carbon intensity technologies have been made, to cut such taxes to win public approval.  Firms who understand this may be reluctant to make the substantial new investments required.  This difficulty needs to be addressed by setting up independent institutions with the authority to credibly commit to carbon taxes longer-term.  Alternatively, the capital investments required can be publicly supplied so that the costs of potential ‘holdup’ are internalized.

 (v) Carbon taxes will impact on resource markets – directly on markets for carbon-based fuels and indirectly on the demand for substitute resources such as nuclear fuels, solar power and their complementary capital resources.  Demands for carbon-intensive fuels will decline and there will be increased demands for the substitute resources and the substantial capital stocks they need to draw on as well as reduced demands for inputs complementary to the burning of fossil fuels.  Overall there should be a substantial increase in demands for capital in the power generation sector that should impact on the global cost of capital resources. In general these types of intersectoral effects are particularly important in open economy contexts as will now be discussed.

(vi) A key issue concerns how taxes are initially enacted and how they are subsequently adjusted to reflect tighter emission targets and also new information about the costs of carbon emissions and of abatement.  Should taxes be gradually introduced from low levels and on a narrow tax base with many producers protected by ‘grandfathering’ provisions or should the economy be exposed to distinctly high taxes on a broad base ‘cold turkey’?  Once taxes are introduced their value should increase at the rate of return on capital since their effects are broadly similar to quotas established under an emissions trading scheme and, for such quota assets to be held, their values must increase at the same rate as other capital assets.  Metcalf and Weisbach (2009, p17-22) argue for ‘cold turkey’ policies that will motivate firms to begin making adjustments now.  With respect to the impacts of new information significant abatement opportunities involve long-term investments so that tax rate revisions on the basis of new information do not need to occur frequently.

(vii)  Carbon taxes are often advanced with unrealistic objectives of revenue neutrality objectives.  In fact public revenue needs may change when such taxes are introduced because of the need to compensate workers displaced from certain carbon-intensive industries and because of the need to fund public investments in R & D.

The detailed impacts of imposing carbon taxes on an economy are complex given spillover effects onto both consumer and factor markets.  The best way of accounting for such effects is by using computable numerical equilibrium models which account for intersectoral linkages.  Such models can account for the effects of spending the tax revenues received in various ways. For example, an issue is whether using such revenues to cut other distortionary taxes in the economy – such as income or excise taxes – will provide additional gains in the form of ‘double dividend’ benefits  (Fraser & Waschik, 2010).  There are no simple answers here so empirical analyses are essential. Using carbon tax revenues to cut other excises could have indirect effects in increasing the demands for polluting goods.  Imposing carbon taxes reduces the real income of workers thereby, by itself, increasing the distortionary effects of income taxes on labor (Sandmo, 2009, 17-18).

3. Choice of a tax base.  The choice of a tax base involves choosing the optimal breadth and coverage of the tax as well as whether to tax producers or consumers.  The breadth issue involves trading off the benefits of increased inclusiveness against administrative and collection costs.  In countries such as the US it is estimated that, by collecting carbon taxes upstream, 80 per cent of emissions can be covered by taxing fewer than 3000 taxpayers and that 90 per cent can be covered at moderate cost (Metcalf and Weisbach, 2009).  This concentration is due to the 80 per cent contribution of energy use in US emissions.   Globally energy plays a smaller percentage role in total emissions because of a more significant role for land use changes, especially deforestation, and agriculture in stimulating emissions in developing countries. Ways of including forestry and agriculture in the tax base are of particular significance for developing countries.

The benefits from a broader tax base include the greater revenues yielded which reduce the costs on individual firms taxed under a narrower base.  The offset is the greater political opposition that a broadly-based tax is likely to generate despite the lower tax impacts.

In a closed economy setting the choice between taxing producers and consumers is largely irrelevant but in an open economy – where a country can buy or sell outputs from another and where capital resources are mobile and hence can relocate internationally – it matters profoundly.  The analysis to follow makes particular sense for industries other than the electricity sector which typically produces a non-internationally traded good.  It applies, for example, to steel, cement or alumina production – for specificity take the case of steel.

Steel exports from a country which taxes its carbon emissions will face higher costs, on this account alone, compared to production from countries which do not mitigate emissions. Such exports face a competitive disadvantage in international markets simply because globally desirable carbon mitigation objectives are being pursued.  Similarly, the competitiveness of locally-produced steel in a local market will suffer if carbon emissions are taxed locally but not in countries supplying competing steel outputs.   In each case the products of countries taxing emissions will experience a competitive disadvantage as a consequence of the tax compared to the products of countries which do not.  In addition, firms in a country subject to carbon taxes may have incentives to relocate to countries without such a tax – to relocate to ‘pollution havens’.

These phenomena are instances of ‘carbon leakages’ since the output diversions and the relocations mean that carbon pollutions simply shift towards countries which do not tax such emissions.  The resulting carbon pollution shifts from a point where it is taxed to where it isn’t and the countries which do mitigate lose industrial employment and output as well as facing costly structural readjustments without a global environmental improvement occurring.

The empirical extent of such leakages is the subject of considerable controversy – for many industries the cost increases from a carbon tax are small because energy costs are a small fraction of total costs. In other cases such as transportation and electricity, which are energy intensive, carbon leakages are irrelevant because the goods or services are not internationally traded.  In a few key sectors – steel, aluminum and cement – leakages are likely to be important. Babiker (2005) argues that, indeed, such leakages may be greater than 100 per cent of their original levels.

 This said it cannot be denied that the notion of significant leakages does discourage some developed countries from actively moving towards carbon pricing. For example, the United States refused to ratify the Kyoto Protocol largely because developing countries were not obliged to mitigate their emissions under it. The US saw loss of competitiveness and carbon leakages as an important issue.

Clarke (2009) has suggested taxing carbon emissions on a consumption (or carbon destination) basis rather than taxing the emissions on a production (or carbon-origin) basis. In short, one taxes goods that involve carbon emissions in their production on the basis of where they end up being consumed – their destination – rather than where they are produced – their origin.  This means that carbon-intensive exported goods are exempt from taxes while imports of carbon-intensive goods must be subject to border tax adjustments which make their tax treatment consistent with that of locally-produced goods.

The issue of designing an open economy tax base is difficult.  Metcalf and Weisbach (2009) argue for a modified destination basis but without tax exemptions for exports (ibid, p24) because such exemptions would lead to a diversion of output to exports thereby creating leakages (ibid p53). The standard way of providing such compensations however is to make them lump-sum which protects the incomes of exporters.  In addition, Metcalf and Weisbach argue that taxes on imports from countries which do not mitigate would punish countries that didn’t mitigate by leaving them disadvantaged.  That is not clear – countries which hold out in the face of mitigation efforts by others may gain residual leakage benefits by being shorter on the list of possible ‘pollution havens’ (Clarke, 2010 forthcoming).  

There are however several advantages from a pure destination-based scheme compared to a pure origin-based scheme:

(i)  The use of border tax adjustments levied on imports of untaxed carbon-intensive goods seems consistent with the rules of the GATT-WTO which generally disapprove of taxes on traded goods (Taniotti et al., 2009). 

(ii)  Adverse competitiveness effects due to carbon leakages from countries which tax carbon emissions to those which do not are eliminated. Exports are exempt from taxes, the competitiveness of local taxed carbon-intensive goods are secured by the border tax adjustments and firms have no incentive to relocate from countries which do mitigate to non-taxing countries in order to export to the countries which do mitigate – ‘pollution havens’ become less relevant.

(iii) Incentives for non-mitigating countries to mitigate are enhanced at least to the extent that carbon tax revenues now accrue to them rather than to countries which impose destination-based carbon accounting on their untaxed imports.

(iv) There are improved incentives for countries, such as the United States, to unilaterally mitigate their emissions given their past reluctance to do so based on a cost-benefit analysis of the consequences of unilateralism given prospects of carbon leakages.  Paradoxically, while features such as border tax adjustments are viewed negatively by developing countries such as China and India, they provide advantages to countries which will suffer great harm from climate change and which would gain national advantage were developed countries, such as the United States, to mitigate because they became less fearful of the consequences of unilateral carbon charging for their national competitiveness.

The major disadvantage of selecting a consumption tax base is that it leaves untaxed carbon-intensive exports from mitigating to non-mitigating countries. Since these products will then face reduced demands in their country of export – petroleum and coal exporters which tax on a consumption basis will demand less of such fuels themselves – the net outcome will be an improvement in the terms of trade for carbon importers given induced price falls of such commodities.  This is a type of global macroeconomic carbon leakage that reflects the fact that concerted action to mitigate by fuel exporters will reduce the price of such fuels in countries which do not mitigate their emissions.

This might not be a decisively adverse implication of destination accounting.  The use of this accounting can be viewed as a precursor to fully-fledged, origin-based accounting which is certainly a long-term ideal since, if uniformly implemented, it removes the need for costly border tax adjustments and high transaction cost, export-rebate exemptions.   Computing border tax adjustments is non-trivial since the adjustments are country and technology specific. For example, it would not make sense to impose a border tax adjustment on imported alumina that was produced using non-polluting hydro-power.  Similarly exempting exports is complex since such exemptions cannot be ad valorem without inducing a switch from production for domestic to production for export again creating a basis for leakages.  Provisional use of a destination-based system might encourage imitative mitigation efforts and ultimately a switch to a global origin-based system.

4. Carbon taxes versus emission trading schemes.   There are distinctive and complex issues that affect the choice between carbon taxes and an emissions trading scheme (ETS) in open economies. Hence the issue is first discussed in an idealized closed economy – one not involved in international trade – and this is then followed by the case of open economies.

In a closed economy control of carbon emissions can be realized by a tax on carbon emissions or by a quota on total emissions per period which can be freely traded.  It is  always possible to select a carbon emissions quota which, assuming market conditions remain stable, will realize the level of emissions realized with any carbon tax.  

An ETS involves initially allocating the aggregate quota in some way to carbon emitters and then allowing it to be freely traded in an emissions market.  Those who value the quota most will pay most for it so it should end in its highest value use thereby realizing economic efficiency.  If the carbon quotas are initially auctioned to the highest bidding emitters then, again abstracting from uncertainty, the fiscal implications of an ETS are identical to the corresponding carbon tax – ignoring differential collection and administrative costs both policies yield identical revenue.  Under these conditions the choice between a carbon tax and an ETS is of second-order importance.  The important issue is to control emissions and each of these approaches yields the same outcome.

The analysis changes if policy-makers are uncertain about demands for carbon emissions because of uncertainty over production costs or the demand for carbon-intensive outputs.  If a carbon tax is set with uncertain demands or costs then the resulting extent of emission control becomes random and the achievement of exact emission targets unlikely.  If, alternatively, a particular quota is set but the demand for output is uncertain then the equilibrium carbon price becomes random.  The question then becomes which type of uncertainty is preferred.

Some claim that a randomly varying and highly uncertain carbon price makes it difficult for those seeking to commit to long-lived and irreversible capital investment decisions. It might also promote increased short-term volatility in energy prices creating the potential for poor decisions and suggesting a case for a fixed carbon tax.  This claim can be overstated since there are opportunities to hedge carbon price uncertainty in futures markets and the viability of long-lived investment projects depends on long-term carbon price trends rather than short-term fluctuations.  In addition, if the price variability reflects the health of the macro-economy – with carbon prices being lower in recessions and higher in booms – then price variability has the desirable feature of acting as an automatic economic stabilizer with charges rising in boom periods and falling back during recessions. 

Protection against very sharp carbon price hikes following unexpected surges in fuel demands – for example those that might occur as a consequence of a cold northern hemisphere winter – can be addressed using dual tax-cum-emission trading schemes.  Here an ETS operates under normal conditions but a price-ceiling is set for emission permits with a government agency being prepared to stand in the market to deliver unlimited emission quotas at the ceiling price.

There is also a fear – partly induced by evidence of ethical misbehavior in financial markets during the recent GFC – that futures markets in carbon prices might be subject to manipulation via insider trading by those, for example, involved in the power generation sector. Taxes are also seen as a more flexible policy instrument that is less vulnerable to evasion and corruption (Shapiro, 2007).

Another claim is that setting carbon taxes offers lower potential for special interest groups in market economies to make claims for special treatment in terms for free or generous quota allocations under an ETS that would not occur with a tax.  This seems unproven since the same interest groups can equally well argue for tax exemptions. Generous free quota allocations transfer wealth between different groups in an economy but do not undermine the environmental efficacy of an ETS, as well as the potential for the scheme to be revenue neutral by offering compensations, but it is not clear that similar costly defects will arise from selective tax exemptions.

An argument sometimes advanced for an ETS rather than carbon taxes is that carbon quotas sold have value as assets in the hands of their owners. These owners would defend such a scheme in order to preserve such value thereby improving the longer-term credibility of an emissions control scheme.   This again seems unproven since governments have shown themselves to be reluctant to abandon lucrative tax bases such as fuel excises.

The case for targeting emission levels via an ETS is mainly that it assures a certain level of emissions control. This is of particular concern in an international setting where countries agree to target a certain emissions cut as part of a comprehensive agreement.   Climate scientists know the level of global cuts necessary to offer high confidence of achieving certain desired climate targets. For example the widely-advocated target of restricting warming to 2^oC means that a global climate agreement must provide an arithmetic framework for achieving such reductions by aggregating agreed on cuts by individual nations.

In an integrated world economy there are distinctive arguments for and against an ETS alternative to carbon taxes.  Two arguments have particular merit: 

(i) An ETS permits global distributional fairness. With an ETS there is the important advantage of being able to allocate carbon emission quotas internationally to reflect the different development needs of nations while retaining efficiency in emissions reduction.  A major concern of developing and emerging countries is that they currently have low levels of emissions per capita compared to developed countries. A claim by countries, such as China and India, is that they should be entitled to increase their aggregate emissions – coupled with substantial energy intensity reductions – to a point where their per capita emissions and energy consumption levels are comparable with developed countries.  This objective is consistent with an ETS provided that an asymmetrically large level of emission quotas is given to developing countries for a transitional period while their energy consumption levels are catching up to those of developed countries.

Because emission quotas are valuable assets this is essentially a resource transfer from developed to developing countries.  Substitutes for such a resource transfer could, alternatively, be income transfers or low cost access to new low carbon intensity production technologies from developed countries.

The desired size of the transfers here is bounded by the requirement that all countries should enjoy welfare gains from jointly mitigating emissions after paying or receiving transfers. This rejects the views of Bhagwati (2010) and others who claim that compensations must be paid to developing countries on the grounds that the cumulative emissions of the developed countries were very large and now it is the turn of the developing countries to enjoy the same entitlement.   This argument is factually questionable  – when changes in land use is also taken into account, the developing regions of the world have actually been responsible for some 45 per cent of total carbon dioxide emissions since 1850 (Houghton, 2008) and, even were this not so, past emissions imply no culpability when damages were then not recognized. In addition, most of the polluters who caused these damages are deceased.  The issue is not compensation for past misdeeds but to devise a comprehensive, collective, international agreement where all participants will gain.

(ii) Traded international carbon quotas can drive cost efficiency.  If quotas are internationally tradable then developing countries have incentives to rely on low carbon technologies and to sell unused quotas in international markets.  This can yield further efficiency gains. With enough trade in such quotas their price will be driven to equality internationally suggesting that emissions reductions will be occurring in areas where they can be achieved at lowest cost – such trade has been estimated to reduce the costs of emissions reductions by 20 per cent (Tony Blair and Associates, 2009). Emissions reductions would then be achieved with global economic efficiency.

A carbon tax can be set differently in different countries to accommodate distinct national circumstances but, if this is done, global emissions reductions efforts are necessarily inefficient since different carbon prices will prevail in different countries. That carbon emissions are being valued differently in different countries implies foregone opportunities to trade and hence economic inefficiency.  Nordhaus (2006) proposes harmonized taxes across countries with income compensations or technology transfers from wealthy to poorer countries and with complete exemptions for very low income countries but seems to offer no mechanism which determines the requisite scale of the transfers. 

The advantages of international trade in carbon emission quotas to reduce the global costs of emissions reduction have been questioned.  An additionality requirement for such trade to improve efficiency is that when a quota is purchased a corresponding emissions reduction must occur on the part of the vendor and that this reduction would not have occurred in the absence of an ETS.

The issue of verification of emissions reductions proved to be a stumbling block in the recent Copenhagen negotiations. In particular neither China nor India agreed with the United States on verification procedures.  The notion that emissions reductions are not reductions that would have occurred without free trade and an ETS is a well-recognized difficulty of the Kyoto Protocol approved current Clean Development Mechanism.

5. Conclusions and final remarks.   Carbon taxes are Pigovian taxes which seek to address the global costs associated with carbon emissions.  They have significant effects on markets for goods which utilize carbon-intensive inputs and on markets for these inputs themselves as well as substitute and complement inputs.

The choice of a carbon tax base is of importance in an open economy where carbon leakages can arise.  Leakages associated with loss of competitiveness of a mitigating country’s exports and its import-replacement sectors as a consequence of carbon taxes can be offset by using a consumption or destination basis for taxing – by exempting exports from taxation and by imposing border tax adjustments on untaxed imports.  This also reduces the incentive of firms to relocate to pollution havens compared to the case where origin accounting is used.  A difficulty with using a consumption basis is that by reducing mitigating country demands for carbon-intensive outputs it reduces the prices of such goods thereby inducing general macroeconomic carbon leakages in non-mitigating countries.

The case for using a carbon tax is often contemplated with an ETS alternative in mind.  There are various arguments for each policy approach but a strong advantage of an ETS over a carbon tax is that it facilitates the assignment of reduced mitigation obligations on developing countries while still being consistent with economic efficiency.  In addition if carbon quotas are internationally tradeable it reduces the global costs of mitigating emissions.  A difficulty of trading global carbon quotas lies in verifying the bona fides of actual deals.

To many the key issues of concern in the climate change debate are those of securing a workable global environmental agreement rather than specific concerns over design of a carbon tax or use of an alternative policy such as an ETS. There has been a neglect of such international strategic issues in the preceding discussion.  However there are important implications of carbon charging design for broader issues of negotiating such an agreement.

The strategic implications of appropriately selecting a carbon tax base seem to be a particularly important issue. A key issue is the additional incentives it offers developed countries to unilaterally mitigate their emissions. In addition, an integrated international carbon emissions market offers cost savings which can be shared among all participants and also can be designed to protect the legitimate development objectives of emerging economies.

 References

M. Babiker, 2005,’Climate Change Policy, Market Structure and Carbon Leakage’, Journal of International Economics, 65, 421-455.

J. Bhagwati, 2010, ‘A New Approach to Tackling Climate Change’, Financial Times.com, February 22, 2010. Online at  http://www.ft.com/cms/s/0/c9ee09b0-1fe7-11df-8deb-00144feab49a.html.

Office of Tony Blair (2009), ‘Breaking the Climate Deadlock: Cutting the Cost – The Economic Benefits of Collaborative Climate Action ’. University of Cambridge, September.

Online at  http://blair.3cdn.net/16ee85353ed6f87d1f_uem6iykby.pdf

H. Clarke (2009a), ‘Carbon Leakages, Free Riders and International Climate Change Agreements’, mimeographed, 2009.

H. Clarke (2010), ‘Trade Policy and the Global Environment’, Surveys and Perspectives Integrating Environment and Society, forthcoming.

H. Clarke (2010b), Strategic Aspects of International Climate Change Agreements, Australian Journal of agricultural and Resource Economics, forthcoming June. 

R.A. Houghton, 2008, ‘Carbon Flux to the Atmosphere from Land-Use Changes: 1850-2005’ in TRENDS: A Compendium of Data on Global Change. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, U.S. Department of Energy, Oak Ridge, Tenn., U.S.A. Online at

 http://cdiac.ornl.gov/trends/landuse/houghton/houghton.html.

G. Metcalf & D. Weisbach, 2009, ‘The Design of a Carbon Tax’, University of Chicago Law & Economics, Olin Working Paper No. 447, University of Chicago, Public Law Working Paper No. 254,  January.  

 W. Nordhaus, 2006, ‘After Kyoto: Alternative Mechanisms to Control Global Warming’, American Economic Review, 96, 2, 31-34.

R.J. Shapiro, ‘The Carbon Tax: The Alternative to Carbon Trading’, Growth, 59, November 2007, 66-75.  Online at:

http://www.businessspectator.com.au/bs.nsf/Article/The-great-carbon-debate-8XBYH?OpenDocument

A.. Sandmo, ‘The Scale and Scope of Environmental Taxation’, Discussion Paper SAM18, Department of Economics, Norwegian School of Economics and Business Administration, October, 2009. 

L. Taniotti, A. Olhoff, R. Teh, B. Simmons, V. Kulacoglu & H. Abaza, 2009, Trade and Climate Change: A Report by the United Nations Environment Programme and the World Trade Organisation,  UN and WTO, Switzerland.  Online at:

http://www.wto.org/english/res_e/booksp_e/trade_climate_change_e.pdf

I. M. Fraser & R. Waschik, 2010, ‘The Double Dividend Hypothesis in a CGE Model: Specific Factors and Variable Labour Supply’, La Trobe University Working Paper.

M.L. Weitzman, 2009, ‘The Extreme Uncertainty of Extreme Climate Change: An Overview and Some Implications’, mimeographed, October.  Online at:

http://www.economicsclimatechange.com/2009/12/extreme-uncertainty-of-extreme-climate.html

G. W. Yohe,  R.D. Lasco, Q.K. Ahmad, N.W. Arnell, S.J. Cohen, C. Hope, A.C. Janetos and R.T. Perez, 2007, ‘Perspectives on Climate Change and Sustainability’ in M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson (eds) Climate Change 2007:  Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK,  811-841.

Over the 5 years total exports to our 14 major markets grew from $126b to $196b.  Imports grew from $149b to $201b.  Exports to China grew from $13b to $42b.  As a fraction of total exports they grew from 10 to 21%.  Our imports from China grew from $19b to $36b. Exports to Japan grew strongly too from $24b to $38b – Japan remains our biggest export market. Exports to India more than doubled from $6b to $14b. The really massive growth in exports of course has been concentrated in the two areas – crude materials other than fuels and in mineral fuels. Obviously terms of trade improvements – surging coal and iron ore prices in particular – have been an important factor.

The surge in our exports over recent years must have been a key factor in preventing Australia going into recession as a consequence of the GFC.  It is a stunning overall picture of the enormous strength and potential of the Australian economy.

The best gamay wines come from Beaujolais and the Loire Valley in France.   The grape itself is a clone of pinot noir without the pretensions of pinot but with a happy affability – and a somewhat spicy, aromatic fragrant finish. Like many of the French wines I drink, it offers a welcome retreat from the overpowering reds that distinguish the Australian scene. Indeed, in Australia, you must pay more to get a lot less – more approachable red wines. 

At Dan Murphy’s I have bought a couple of Beaujolais-Village over the last few days for between $12- $16.  Not great wine but enjoyable. The snobs don’t like this stuff but economists, such as myself, revel in the fact that purchasing it is a market opportunity – a bulk, inexpensive wine with interest.  I don’t think there are more than a few significant gamay producers in Australia – one Yarra Valley producer got tragically burnt out in the 2009 bushfires.

It is interesting how people can compartmentalize their approaches to understanding different aspects of the world. Science and evidence are guides to certain parts of their lives but in other areas superstitious belief take over.  There is something sad about the need for this. As Bertrand Russell pointed out:

“There is something feeble and a little contemptible about a man who cannot face the perils of life without the help of comfortable myths.  Almost inevitably, some part of him is aware that they are myths and that he believes them only because they are comforting.  But he does not dare face this thought!  Moreover, since he is aware, however dimly, that his opinions are not real, he becomes furious when they are disputed.”                       

By coincidence I also yesterday attended a university discussion on academic policy.  It was a private affair and I won’t discuss specifics but again I am struck by the universality of the compartmentalization phenomenon.  The sorts of principles we seek to instill in undergraduate students – for example, that claims about the world should be based on evidence not anecdotes, not ad hominem argument or simply unsubstantiated though plausible-sounding claims – are often rejected by those at the most senior levels of academic administration in Australian universities.  If they were isolated from their context and their power base they would be exposed to utter ridicule by those with ordinary intelligence.

There are those who might rail about the idiocy of Chairman Mao’s pursuit of steel production targets in the 1960s without attention to resource constraints and the difficulty of centrally managing complex organizations without delegation but who also find no difficulty in applying exactly these same inefficient, views and centralist – indeed Stalinist – techniques in a university.  We who don’t teach and have done little research will nevertheless tell you what to do.  “What is the role for academics in academic planning issues anyway – call the marketing area and consult those failed academics who dominate academic administrations on what should be done – they have gotta be good at something!”

Err, no, they don’t.

If you point out the divergent modes of thought then eyebrows rise – you are ignoring ‘politics’ – a catch-all idea that these days is used to gloss over any need to think through anything carefully.  “Proposition X is stupid” – “Yes, I know that but it’s all politics”. Probably the presentation of views without supporting argument in certain ‘dialogue’ situations is simply a way of asserting who is the boss – there is no interest in determining the most sensible views, only in implementing those held by non-reflective leaders further up the chain who at all costs must “win”.

It is interesting for me that a major reason for friends and colleagues leaving universities these days is the failure of academic administration.  People simply tire of listening to the authoritarian rubbish of the Little Napoleons.

Consistency is an underrated virtue.

Obama was supposed to be anti-gun but the expectation that he might be and the fact that he apparently is not have had serious impacts on gun control in the US. The US states are engaged in a new push for expanded gun rights, even passing measures that have been rejected in the past:

• In Virginia, the General Assembly approved a bill last week allowing people to carry concealed weapons in bars and restaurants that serve alcohol and voted to repeal a 17-year-old ban on buying more than one handgun a month. The actions came less than three years after the shootings at Virginia Tech that claimed 33 lives and prompted a major national push for increased gun control.
• Arizona and Wyoming lawmakers are considering many pro-gun measures, including one that would allow residents to carry concealed weapons without a permit.
• Lawmakers in Montana and Tennessee passed measures last year — the first of their kind — to exempt their states from federal regulation of firearms and ammunition that are made, sold and used in state. Similar bills have been proposed in at least 3 other states.
• Gun control advocates say, Mr. Obama has failed to deliver on campaign promises to close a loophole that allows unlicensed dealers at gun shows to sell firearms without background checks; to revive the assault weapons ban; and to push states to release data about guns used in crimes. For example, Obama signed bills last year allowing guns to be carried in national parks and in luggage on trains.
• The Indiana legislature passed bills that block private employers from forbidding workers to keep firearms in their vehicles on company property.

In the gun-loving US guns are becoming more popular – Federal background checks for gun purchases rose to 14m in 2009, from 12.7m in 2008 and 11.2 million in 2007.  Pity.