The pros and cons of a global carbon tax at a single rate

Abstract

During 2021, the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the World Trade Organization (WTO), though differently, supported the idea that to effectively tackle climate change, it is necessary to introduce a global price on carbon emissions. Generally, a single-rate Global Carbon Tax (GCT) for all carbon emissions would probably be the best mechanism to tax carbon emissions while still favouring trading relationships globally within a WTO-compliant environment. However, implementing a single-rate GCT is extremely complicated. The IMF has proposed the establishment of an International Carbon Price Floor (ICPF), but it has recognized that to work the ICPF needs multiple carbon price minima according to the considered countries’ category of development level. This article, which is divided into seven sections, reflects on the idea of introducing a GCT. Section 1 briefs the introduction. Section 2 explains what the main reason is for putting a price on carbon emissions and clarifies how the two most important price-setting mechanisms, ie an ETS and a carbon tax, work. Section 3 explains how to set the carbon tax rate. Section 4 analyses the IMF’s GCT proposal. Section 5 discusses the benefits of a GCT, especially if based on a single tax rate. Section 6 reviews what, at least in the short term, the three main obstacles to the implementation of a single-rate GCT are. Section 7 concludes.