ABSTRACT

Taxation not only provides government revenues, but it may also promote economic efficiency by internalizing unpriced externalities back into the price system (see Polluter pays principle). These taxation functions normally occur within a sovereign nation, but technological progress and globalization have made them increasingly important between nations due to the emergence of major inter-nation externalities. An ideal carbon tax design would levy a tax rate that is highest on coal, which has the highest carbon content per unit of energy produced, a lower rate on oil, which has less carbon content than coal, and lowest on the least carbon-emitting fuel, natural gas. Taxation is inherently unpopular due to its “compulsory” nature, compared with the “free choice” nature of market transactions. Moreover, it faces even greater resistance at the supranational level where sovereign political authority is absent.