Updated: January 8, 2010 16:06 IST

Pollution tax

D. Murali
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The problem of designing national and international carbon taxes is akin to the problem of public finance with many levels of government or fiscal federalism, observes M. N. Murty in ‘Environment, Sustainable Development, and Well-being’ ( The book proposes, therefore, a federal set-up where the world economy has many levels of authority (say an International Agency or IA, and national governments), with the optimal national and international taxes on CO2 emissions.

The author argues that a national carbon tax can be inefficient if its design does not take into account the global climatic effects of CO2 emissions. “Independent or isolated decisions about carbon taxes by countries will take into account only local effects and, therefore, taxes fixed through a set of such decisions are not optimal from the point of control of global environmental pollution.”

Assuring that an optimal carbon tax for the world economy can be designed taking into account the effects of carbon emissions of a country on climatic changes and their effects on the welfare of people in different countries, he proceeds to present mathematical models and Lagrangean equations.

The ‘second-best’ domestic as well as international carbon taxes can be designed, says Murty, by using the many-person and many-country Ramsey model for the world economy. “Optimal carbon taxes are country-specific and a tax on a domestically produced carbon-intensive commodity can be decomposed into a revenue tax, a tax to control local atmospheric pollution, and an international carbon tax.”

The optimal international carbon taxes and revenue transfers and national pollution taxes can be obtained as a solution to the Nash non-cooperative equilibrium of the world economy in which an IA and national governments are players, he explains. For, as you may appreciate, “Controlling environmental externalities with different spatial dimensions requires a complex set of instruments and institutions.”

Ideal read for the avid pollution researchers, and prescribed study for the inveterate polluters.


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