Environmental Quality Flashcards
What are corrective taxes?
A tax that helps the government achieve specific policy goals
What is the idea behind indirect consumption taxes?
Companies that collect these taxes will raise the consumption price with the amount of the tax -> consumers pay the tax indirectly through that
A uniform Value Added Tax (VAT) is comparable to…
A flat income tax -> has same effect on labor supply decisions
Only difference is treatment of unemployed and pensioners who pay VAT but no income-tax
3 reasons to have both direct and indirect taxes?
- Spreading collection chances lowers tax evasion
- Political attractiveness: right in favor of consumption tax, left in favor of income tax
- Indirect taxes useful in achieving specific policy goals and correct market failures (externalities often tied up with consumption)
Corrective taxes require…
A formal policy goal
Economic analysis of climate change looks at…
How can the goal of lowering emissions be achieved against the lowest possible welfare loss?
Definition of externality
An unpriced effect of an action -> something is used that is not priced (missing market)
Carbon emission market does not take into account climate change in the price
How to solve the problem of the carbon emission market not taking climate change into account?
Tax CO2-emissions with a carbon tax
How does a negative externality change the costs in a market?
It creases a social cost line in the production of goods - usually a social cost line above the private cost line or a social demand line lower than the private demand line
2 different type of externality curves
- Social cost increases the same per unit supplied
- Social cost increases per unit supplied, leading to higher and higher social costs per unit supplied
While negative externalities lead to over-consumption, positive externalities lead to…
Under-consumption (innovation, schooling, voting)
What is the marginal damage in a market?
The extra costs on society caused by the externality
How is the social marginal cost calculated?
Summing the private cost and marginal damage
What is the solution to negative externalities that Arthur Pigou proposed?
Creating an artificial signal that represents the damage done that is not taken into account -> this could be a tax that ensures that we end up in the socially desired equilibrium if the tax = marginal damage at the amount supplied
On a graph, what is the social gain from a tax on a negative externality?
From Q* (original amount supplied) to Q’ (reduced supply) up to the marginal damage curve
Another approach to solving external effects: Coase
An externality is a missing market. Nobody owns the climate and thus nobody values it -> solve externality by allocating property rights
Another approach to solving externalities: Ostrom
Local communities with informal laws and rules can correct externalities; but becomes harder with too many actors
Another approach to solving externalities: Weitzman
Cap-and-trade system with fixed amount of permits based on demand from firms
2 instruments that impose a constraint - for negative externalities
- Paying for the (expected) damage done, e.g., tax, cap-and-trade
- Standards/norms regarding emissions cap or technology used
2 instruments that relax a constraint - for positive externalities
- Subsidies
- Information provision
What solution to externalities do economists often prefer?
Paying for the (expected) damage done - pricing decentralizes the decisions, so the actors can decide themselves
What is efficient regarding a tax or cap-and-trade system for reducing emissions?
Individual actors can decide for themselves if they want to reduce emissions or not (if they can efford not to). Actors who can reduce emissions cheaply will do so more than actors who cannot -> lowest welfare cost
A more uniform price in all sectors is…
More efficient
What level of price/tax rate is needed - 2 options
- Compute the value of the marginal damage done
- Use the marginal abatement cost curve and compute the price needed to reduce emissions to a certain target
What is an abatement cost curve?
A graph listing all the options to reduce carbon emissions after how costly it would be
How can we calculate a tax rate using an abatement cost curve?
If the cost of 5 different options would be below 100 euros per ton -> a tax of 100 euros per ton would ensure that all those techniques would be carried out
What is the EU ETS?
A cap-and-trade system regulating carbon emissions in the European energy-intensive industry
Limited amount of permits are handed out, decreasing every year until 0 in around 2055
How does uncertainty effect the EU ETS system?
Keeping the price very low - will governments actually uphold their promise to reduce permits? Are companies expecting cheap abatement options in the future with new technology?
Why has the EU ETS recently seen a huge increase in prices?
EU becoming more ambitious in their goals to reduce emissions faster -> expectation of lower availability of permits in the future -> demand for permits now (you can save permits for a couple of years) -> higher prices
When are taxes and cap-and-trade systems equivalent?
Under perfect information
What is the key difference between taxes and cap-and-trade systems in the case of imperfect information?
A tax ensures a maximum/minimum price to be paid by actors, but leaves the amount to be reduced free -> you can adjust the tax but not the amount of reductions
A cap-and-trade system ensures that you reach specific reduction goals, but there is no maximum/minimum price to be paid
What is key to both taxes and cap-and-trade systems?
Monitoring! Emissions must be counted, permits registered, non-compliance enforced
3 things to do if the price becomes too low or high in an ETS system?
- Creating a floor price by letting the government buy permits to increase the price
- Introducing a CO2-minimum tax
- A ceiling created by government selling additional permits to decrease the price
What does it mean that the tax base erodes with a tax?
Tax affects labor supply -> working less, buying less of a good which is a welfare loss
Why can tax erosion sometimes be a good thing?
Corrective taxes are introduced specifically to ensure the consumption is being reduced -> tax base erosion is the goal
When introducing a corrective tax, should you only correct for externalities or maximize revenue?
Economists argue for choosing the environmental goal and using other taxes for revenue raising
What to do with tax revenues from corrective taxes - 3 options
- Return to households lump-sum (transfer with no conditions)
- Subsidize the development of technology to encourage positive externalities
- Lower the income tax
Will lowering the income tax with revenues from environmental taxes improve labor market outcomes?
Probably not - both income tax and corrective taxes affect labor supply decisions -> more jobs not likely to happen
