many economists. All taxes affect theallocation of resources. However, whereasan income tax distorts good behaviour andcauses people to work less and pursuemore leisure activities, a consumption taxdiscourages consumer spending andencourages people to save more.Differently put, the benefit of consumptiontaxes over income taxes is that they do notdistort the intertemporal allocation of consumption. There is also empiricalevidence that confirm that consumptiontaxes affect growth less than income taxes(See Milesi-Ferretti and Roubini, 1998, foran overview of the literature).
Correcting the market failures
A carbon consumption tax has all theadvantages of a consumption tax.
However, in addition it corrects for themarket failure of carbon emissions. Thus,instead of distorting economic activity as
Like other flat taxes, a carbon consumptiontax can be regressive with respect to income,i.e. the tax imposes a greater burden on low-income than on high-income households sincelow-income household consume more of theirincome. This is a common objection toreplacing the income tax with a consumptiontax. However, by allocating some of the taxrevenues to compensate the less affluent, thenegative implications of the incomedistribution can be offset.
most other taxes do, a carbon taxinternalises the marginal externalitiesfrom global warming and thereby reallocates resources more efficiently. Which brings us to the environmentalperspective of carbon taxes. The basicpolicy conclusion of the Stern Review isthat a worldwide tax on the consumptionof carbon wouldhold global warming tosafe levels.By means of imposing a price on carbonemissions the demand for fossil fuels would decrease and the development of renewable-energy technologies wouldaccelerate. Depending on the reaction of the suppliers and thus on the elasticity of the supply curve, the reduced demand forfossil fuels reduces emissions andmitigates global warming. Since it seemsreasonable that the supply curve, at least inthe long run, is elastic, the price of fossilfuels increases, and, according to standardtax analysis, the tax burden is shared between consumers and fossil fuelproducers.
A global tax more efficient
Economic theory provides two importantinsights on how an optimal carbon tax