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The economics of the CDM levy: revenue potential, tax incidence and distortionary effects

Fankhauser, Samuel and Martin, Nat (2010) The economics of the CDM levy: revenue potential, tax incidence and distortionary effects. Energy Policy, 38 (1). pp. 357-363. ISSN 0301-4215

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Abstract

A levy on the Clean Development Mechanism and other carbon trading schemes is a potential source of finance for climate change adaptation. An adaptation levy of 2% is currently imposed on all CDM transactions which could raise around $500 million between now and 2012. This paper analyses the scope for raising further adaptation finance from the CDM, the economic costs (deadweight loss) of such a measure and the incidence of the levy, that is, the economic burden the levy would impose on the buyers and sellers of credits. We find that a levy of 2% could raise up to $2 billion a year in 2020 if there are no restrictions on demand. This could rise to $10 billion for a 10% tax. Restrictions on credit demand (called supplementarity limits, the requirement that most emission abatement should happen domestically) curtail trade volumes and consequently tax revenues. They also alter the economic impact of the CDM levy. Without supplementarity restrictions sellers (developing countries) bear two-thirds of the cost of the tax. If there are supplementarity limits they can pass on the tax burden to buyers (developed countries) more or less in full. Without supplementarity restrictions the distortionary effect of the levy (its deadweight loss) rises sharply with the tax rate. With them the deadweight loss is close to zero.

Item Type: Article
Official URL: http://www.sciencedirect.com/science/journal/03014...
Additional Information: © 2010 Elsevier
Library of Congress subject classification: G Geography. Anthropology. Recreation > GE Environmental Sciences
H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 14 Apr 2011 11:52
URL: http://eprints.lse.ac.uk/35125/

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