Sixteenth International Conference on Environmental, Cultural, Economic & Social Sustainability

Abstract

As economists, we are concerned with reaching an efficient allocation, and we know that in presence of externalities -like carbon emissions- the market equilibrium won’t be efficient. Around the world, new policies are being put in place to get closer to that efficient allocation. However, such policies have redistributive effects and there is not a strong theoretical reference as to measure the cost and benefits once redistributive effects are considered. The fundamental question that I want to explore is how to design a system that limits the total level of emissions to a value that is sustainable in the long run – considering the ecological boundaries of the planet- while achieving and efficient and equitable allocation. This question is particularly relevant today because the world is trying to limit global warming and in order to do so many countries have designed carbon taxes. However, it is not clear that this is the best system to do it. Furthermore, even if this is the most cost-efficient way to reduce emissions, it is not clear how to distribute the revenue collected from such taxes. Based on Baumol and Oates (1988), the policy recommendation would be to split the revenue equally among the consumers; based on a new theoretical framework, I will conclude that a subset of the consumers should pay a fee and other subset should receive a transfer.