Climate Policy in a Distorted World by Leslie Shiell and Nikita Lyssenko
Climate policy interacts with multiple market failures and imperfections, amplifying pre-existing distortions and complicating decision making. We focus on (i) distortions in fossil fuel markets, including a discount rate premium, a capital cost premium, and the OPEC cartel in crude oil, and (ii) pre-existing distortionary taxes across the economy.
Our results show that governments should rationalize the existing toolkit of taxation in the energy sector – royalties, end-user (excise) taxes, emissions tax, severance taxes, rent taxes – to rely on an economy-wide emission tax, plus a common resource rent tax and sector-specific severance taxes. Royalties and end-user taxes should be removed, including excise taxes on gasoline. The overarching result of our simulations is that coal is presently under-taxed, oil overtaxed, and natural gas taxed about right while taking account of the greenhouse potential of each fuel source.