A Simple Consumption Tax to Reduce Carbon Emissions

• In Event: Beyond Pigou: Evidence on Efficiency, Equity, and Policy Instruments

Abstract

We present a proposal for a simple consumption tax to reduce carbon emissions. While existing instruments for pricing carbon emissions mainly focus on the source of emissions and thus on the place of production, we present a consistent approach to pricing carbon emissions at the place of consumption. We propose a consumption tax design that accounts for the CO2 emissions associated with goods or services but also provides for varying tax rates and tax-exempt exports. Our proposal is based on central elements of the value added tax (VAT) and incorporates many elements of the existing emission trading schemes (ETS), carbon border adjustment measures (CBAM) but also from financial accounting and sustainability reporting. This approach enables the effective mitigation of the limitations of prevailing climate policy instruments, while ensuring practical feasibility.

We first discuss the advantages of consumption tax on CO2 emissions in comparison to the existing regulations for source-based carbon emission taxes. We address the key challenges of carbon emission pricing: (i) carbon leakage, (ii) competitiveness in international export markets, and (iii) regressive tax burdens on low-income consumers. Secondly, a design for a consumption-oriented carbon emission tax is presented. In particular, we show that such a consumption tax can draw on many already established and proven elements of the VAT, the ETS and CBAM. Finally, we provide several partial analyses of the effects of a consumption-oriented carbon emission tax. We analyze effects on (i) carbon emissions and carbon leakage, (ii) domestic production and exports, and (iii) distributional and income effects.

Authors

• Michael Overesch, University of Cologne

• Celine Wasem, cwasem@wiso.uni-koeln.de