Carbon Taxes and the Green Paradox
By: Michael Hoel
Climate Change and Common Sense: Essays in Honour of Tom Schelling, Hahn, R. and Ulph, U. (eds.), Oxford University Press.
A sufficiently high carbon tax will reduce near-term carbon emissions compared with the case of no tax. For lower tax rates that increase faster than some threshold that is at least as high as the rate of interest, near-term emissions may be higher compared with the case of no carbon tax. Even so, such a carbon tax path may reduce total costs related to climate change, since the tax may reduce total carbon extraction. A government cannot commit to a specific carbon tax rate in the distant future. For reasonable assumptions about expectation formation, a higher present carbon tax will reduce near-term carbon emissions. However, if the near-term tax rate for some reason is set below its optimal level, increased concern for the climate may change taxes in a manner that increases near-term emissions.