Question

In a newly published article in the scientific journal “International Economic Review”, some authors study how carbon taxation could help reducing the climate change problem. They find that:

Carbon taxation is mostly studied in social planner or infinitely‐lived‐agent models, which obscure carbon taxation's potential to produce a generational win win. This paper's large‐scale, dynamic 55‐period, overlapping generations model calculates the carbon‐tax policy delivering the highest uniform welfare gain to all current and future generations. Our model features coal, oil, and gas, increasing extraction costs, clean energy, technical and demographic change, and Nordhaus' (2017) carbon/temperature/damage functions. Assuming high‐end carbon damages, the optimal carbon tax is $70, rising annually at 1.5 percent. This policy raises all generations' welfare by almost 5 percent. However, doing so requires major intergenerational redistribution.

e.The Swedish carbon tax is about $90, i.e. more than $70. Is this aproblem, or is it even better to have a higher tax? Explain using the concepts discussed in c.

Answer 1

Carbon taxation is mostly studied in social planner or infinitely‐lived‐agent models, which obscure carbon taxation's potential to produce a generational win win.

When we come to swedish carbon tax we found that its even better to have a higher tax.

Because, according to the article “International Economic Review”.The policy raises all generations' welfare by almost 5 percent.

Carbon taxes is widely recognised as the most cost-effective way to reduce carbon emissions. Also, A higher tax on carbon emissions will benefit in these ways :

1.Encourages alternatives : A higher price of carbon emissions will encourage firms and consumers to develop more efficient engines or alternatives to consuming carbon emissions.

2. Raises revenue : The revenue raised from a carbon tax can be used to subsidise alternatives such as green electricity or to correct environmental pollution. Alternatively, a higher carbon tax could be used to reduce other taxes, such as VAT.

3. Socially efficient : It helps people to pay the social cost and overcomes the excess consumption.

4. Prevents environmental damages : With higher taxes, firms will reduce pollution and look for alternatives which have a lower environmental impact. For example, it will make solar power even more competitive than traditional fossil fuels.