Is low carbon taxation optimal climate policy for a developing country? - A numerical simulation of technology adoption
The United Nations Framework Convention on Climate Change (UNFCCC) stated in 1992 that developed countries should take the lead in combating the adverse effects of climate change, contributing more to global emission reductions than developing countries. To reduce their burden, and differentiate climate responsibilities between industrialized and developing countries, low carbon taxes in developing countries have been suggested (Rosendahl, 2004, Kverndokk et al., (2014). However, there is little knowledge about the effects of low carbon taxation in developing countries. Is low carbon taxation optimal climate policy or could this in fact lead to a disadvantage instead?
The aim of this thesis is to explore the role of carbon taxes in developing countries in four different scenarios, where the time frame for the global investment in clean technology is altered. The analyses are based on the model of Environment and Directed Technical Change, developed by Acemoglu et al. (2012). The global framework in their model is adapted to the national level of a developing country, and the innovation sector in the initial model is replaced with a “learning by doing-effect”.
The results of the numerical analysis suggest that given that, if a global shift from dirty to clean technology will take place within the next 50 years and that the substitutability between the clean and the dirty input factors is high, it would be optimal for a small developing country to deviate from the classic “policy ramp” of emission tax policy. Instead of letting the tax increase at the rate of the permit price, the optimal trend of the emission tax should be bell-shaped and excessively higher than the permit price, until the use of clean technology starts to accelerate. If the conditions of early technology shift and high substitutability are in place, the implementation of the UNFCCC principles of “common but differentiated responsibilities” should not include reduced carbon taxation in developing countries. A temporarily increased emission tax instead, will contribute to making the clean technology competitive, and opening possibilities for increased growth and consumption in the long run.