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Climate Change, Heterogeneities, and Stability of International Fiscal Harmonization

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Abstract

This paper analyzes the instability introduced into multilateral agreements by two types of heterogeneity: heterogeneity of countries (size and number of producing members) and heterogeneity of lobbies (asymmetric influence at the national versus the international level). The work extends theoretical prospective analyses on environmental taxation, as illustrated by the harmonization of fuel taxes. We show that the acceptability of the tax set at the multilateral level depends on the type of coalitions that participate in the multilateral negotiation (size and number of producing countries) and the asymmetry in the local (state-level) power of lobbies during negotiations.

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Notes

  1. The Global Climate Coalition is an organization based in the US. Until the Kyoto Summit in 1997, its main objective was to avoid any agreement containing constraining objectives. With the help of a group of climate-skeptic scientists, the coalition and its members challenged the conclusions of the Intergovernmental Panel on Climate Change (IPCC) by arguing that climate models are biased and that global warming is not due to human activity.

  2. Negotiations started again in July 2001 in Bonn, where an agreement was reached. It was confirmed and detailed in November in Marrakech. Consequent to the US withdrawal, EU negotiators, concerned about ‘leaving the door open’, have relaxed their positions by conceding important points to Russia, Japan, and Canada for the survival of the process. The Bonn-Marrakech agreements thus significantly weaken the ambitions declared in Kyoto.

  3. For example, at the Rio Earth Summit in 1992, more than 1,500 representatives of NGOs conducted intensive information campaigns based on the climate while pushing the interests of populations facing climate risks.

  4. An example of how ENGOs’ influence on the formal negotiations led to the final adoption of the Cartagena Protocol on Biosafety (CPB) in January 2000 was proposed by Arts and Mack (2003, p. 25). During this period, eight NGOs were present in the Open-Ended Ad hoc Working Group on Biosafety (BSWG-1) and formed a coalition (ECOPORA) that strengthened their input. Hence, NGOs’ influence in both the pre-negotiation and within the formal negotiation process was intensified by cooperation. Moreover, during the ‘real’ negotiation, NGOs seem to be particularly influential ‘outside’ the formal negotiation process through lobbying, promotion, and mobilizing public pressure at the international level (press releases, media, Internet).

  5. Selden et al. (1999) show that the reduction of emissions in the EU was mainly directly related to the Clean Air Act, whose adoption may be largely attributed to NGOs (see also Melnick 1983).

  6. For instance, countries are very heterogeneous relative to the quantity of oil reserves that they own. Coal reserves are another interesting example of heterogeneity: four of the six countries who signed the Asian-Pacific Partnership have among the five largest coal reserves. Meanwhile, in the EU, only Germany and Poland have reserves of coal largest than 10,000 millions of tons.

  7. As stated in the 2003/96/EC Council Directive: “As a party to the United Nations Framework Convention on Climate Change, the Community has ratified the Kyoto Protocol. The taxation of energy products (...) is one of the instruments available for achieving the Kyoto Protocol objectives.” Whether this harmonization will facilitate reaching EU carbon-emissions targets is the focus of a lively debate (Kouvaritakis et al. 2005).

  8. As noted by Vollebergh et al. (1997), given some policy commitment (an environmental policy goal), political acceptability is related to the following issues: goal attainment or environmental effectiveness, the overall costs (abatement costs plus payments of the tax or auctions) of the policy proposal, the distribution of these costs across the participating agents (‘target sharing’ or ‘burden sharing’), implementation, and enforcement problems.

  9. In particular, the following constraints on policy makers should be considered. The collective optimum (in terms of aggregate welfare) is reached when the marginal abating cost is equal across countries. Hence, most emission abatements should be operated by countries with high-energy price elasticity and/or high substitution potential between fossil and carbon-free energies; however, these parameters are far from being revealed and observed ex ante, while the tax level is tangible and is viewed as an indicator of the required effort and risks in terms of international competitiveness (Hourcade and Gilotte 2000).

  10. Accounting for firms’ interests also provides insights into the possible effects of lobbying. Indeed, in the real world, firms’ profits are not lump sums that are redistributed to citizens, and there is no reason to place the same weight on firms’ profits as on consumer surplus.

  11. The conceptual framework is borrowed from the theory of coalition formation in its cooperative and non-cooperative variants. We have voluntarily simplified the concepts to restrict the economic analysis to the questions addressed in this paper (see examples of the complex framework of analysis in Caparrós et al. 2011; Bloch 1995, 1996).

  12. Although we analyze climate policies in the transportation sector and focus our analysis on fuel production and consumption, our theoretical framework may be applied to other goods as well. Hence, we refer to “the good” in the rest of the paper. Fuel is a standardized good, meaning that there are several fuel categories, but each company provides the consumer with the same quality of a given fuel category. For the sake of simplicity, we consider here only one kind of fuel.

  13. Regardless of the chosen interpretation, there is no consequence in the model.

  14. The results of the climate models become progressively more uncertain as the geographically relevant scale becomes more local. It is very difficult, therefore, to predict exactly to what extent global warming will affect Europe, and it is even more difficult to forecast the differences in the magnitude of future damage in France and in Germany, for instance. Adaptation impacts may be different throughout the world.

  15. The KP, for example, has been ratified by 161 countries; negotiations extend to other countries as well at the so-called Conferences of the Parties, once a year. Most countries are grouped in coalitions, and negotiations become a discussion between several more or less solid groups (e.g., the 25 EU members, the Umbrella Group, Alliance of Small Island States).

  16. In the reminder of the paper, the results will be given as functions of \(N\), \(P\), and \(e_1 \), given \(n_2 =e_1 -n_1 \), \(n_3 =P-n_1 \), and \(n_4 =N-P-n_2 \).

  17. We do not consider the possibility of environmental dumping: consumers in one country can import the good from another country, but this good does not become cheaper as a consequence, as the only fiscal regulation consists of a tax on consumption. Thus, tax competition in our paper is not necessarily equivalent to tax evasion, an effect that often appears in other papers (see, for instance, Cremer and Gahvari 2000), but this factor is not at the core of our concerns.

  18. For the sake of simplicity, we exclude unified actions of national lobbies that could yield supranational instances at the “regional” (i.e., coalition) level to revise estimates of environmental damages upward or downward. In other words, we exclude the possibility at this stage that the most unified lobbies may be more influential at the regional than the national level. This hypothesis will be relaxed when the influence at the multilateral level is considered.

  19. Formally, the damage function considered in the global collective welfare criterion.

  20. As highlighted by Arts and Mack (2003) in reference to the negotiations leading to the final adoption of the CPB in January 2000, the formation of ENGOs coalitions during the pre-negotiation phase and the ‘inside’ early stages of the formal negotiations may significantly intensify their influence.

  21. At this step, Mathematica software is necessary to solve the equations.

  22. If \(n_1 <P/2\), \(\hbox { }t_1^*(.)>0,\forall s\) and \(t_2^*(.)>0\hbox { if }s>s_0 (n_1 ,N-e_1 ,P)\) if \(n_1 >P/2\), \(t_2^*(.)>0,\forall s\) and \(t_1^*(.)>0\hbox { if }s>s_0 (n_1 ,e_1 ,P)\).

  23. More precisely, the considered parameter values are \(N=50, P=N/2, e _{1} =N/2, s=0.03, s _{E} =0.0294, a=20\).

  24. The feasibility of internal transfers and thus reaching such an agreement may depend, for example, on the degree of integration of ex ante coalitions.

  25. This equivalence arises because the welfare of the coalition is ‘utilitarian’, i.e., is defined as the aggregate of the individual welfares of the countries’ members.

  26. Remember that \(E_1 \) is composed of \(n_{1}\) producing countries and \(n_{2}\) non-producing countries. \(E_2 \) is composed of \(n_{3}\) producing countries and \(n_{4 }\) non-producing countries, \(n_{3}= P- n_{1}\) and \(N = e_{1}+e_{2}, \hbox {e}_{1}= n_{1}+ n_{2} , e_{2}= n_{3} + n_{4}\).

  27. Given the utilitarian criterion chosen as the indicator of countries’ and coalitions’ welfare, it is evident that when the model is homogeneous (all countries are identical, producers, and consumers), the acceptance of the agreement without external transfers by a coalition implies the acceptance by all the coalition’s members without internal transfers. Hence, in this section, the analysis consists of searching for the first-best agreement de facto without internal transfers and of the second-best agreement de facto with internal transfers. When a coalition does not accept the agreement unless compensating external transfers, it is evident that these compensating transfers will be used for internal redistribution purposes.

  28. The expression of the threshold \(\overline{n} _{1 } (s,s_E ,N)\) in the general case (\(s_E \ne s)\) is too long to be given here. The threshold \(\overline{n}_{1 } (s,s_E ,N)\) is easily obtained through Mathematica, and we can easily verify that the derivative of this threshold relative to \(s_E \) and calculated in \(s \) is null, while the second derivative in this point is positive. The threshold \(\overline{n}_{1} (s,s_E ,N)\) results in a minimum at \(s\) in the definition intervals of parameters (conditions of positivity of taxes and quantities).

  29. The linear form of the environmental damage cost function explains this ‘counterbalancing’ of lobbying effects.

  30. Even if we provide analytical proof, given the complexity of welfare expressions, simulations made on the basis of the values of parameters of the curve 2 are likely to show that in this case the second-best agreement always exists (regardless of the size of the two coalitions).

  31. Similar reasoning holds in the case of a highly influential industrial lobby \(s_E <s\). Such a lobby imposes a tax that is too weak to be accepted even by a producing coalition: such a weak cooperative tax leads to more free circulation of goods within the coalition relative to the benchmark, but the positive effects on producers and consumers in the coalition are countered by the weak control of environmental damage.

  32. As for Proposition 3 and its extension to the heterogeneous case, we can also easily show through Mathematica the minimum and maximum numbers of producers in each coalition that make transfers possible. We can show here also that the lower bound increases and the upper bound decreases with an increasing number of producers.

  33. The Mathematica tool is also necessary here. The critical threshold values are easily obtained, but the formulas are too long to be given here.

  34. In our simulations, we assume that half of the countries in the world are producing countries and that half are consuming countries (\(P=N/2)\). The other numerical values are \(N=60;e_1 =e_2 =N/2;a=10;s=s_E =0.04\).

  35. A similar reasoning holds in the case of a very influential industrial lobby (\(s_E <s)\). Such a lobby imposes a tax that is too weak to be accepted even by a producing coalition: such a cooperative tax leads to more free circulation of goods within the coalition relative to the benchmark, but the positive effects on producers and consumers in the coalition are damaged by the weak control of environmental damage.

  36. As for Proposition 2 and its extension to the heterogeneous case, we can also easily demonstrate via the program Mathematica the two thresholds that frame the number of producers (minimum and maximum) in each coalition that make transfers possible. We can show here also that the lower bound of this set increases and the upper bound decreases with an increasing number of producers.

Abbreviations

GHG:

Greenhouse gas

KP:

Kyoto Protocol

UNFCCC:

United Nations Framework Convention on Climate Change

NGO:

Non-governmental Organization

ENGO:

Environmental Non-governmental Organization

IPCC:

Intergovernmental Panel on Climate Change

CPB:

Cartagena Protocol on Biosafety

SQ:

status quo

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Authors and Affiliations

  1. University of Bologna, Bologna, Italy

    Cristina Grazia

  2. CIRED, Nogent sur Marne Cedex, France

    François Gusdorf

  3. ENPC, Nogent sur Marne Cedex, France

    François Gusdorf

  4. INRA-ALISS, 65 Bd de Brandebourg, Ivry sur Seine, France

    Abdelhakim Hammoudi

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  1. Cristina Grazia
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  2. François Gusdorf
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Grazia, C., Gusdorf, F. & Hammoudi, A. Climate Change, Heterogeneities, and Stability of International Fiscal Harmonization. Environ Resource Econ 58, 579–603 (2014). https://doi.org/10.1007/s10640-013-9711-6

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