Environmental and Resource Economics

, Volume 68, Issue 3, pp 445–472 | Cite as

Why Finance Ministers Favor Carbon Taxes, Even If They Do Not Take Climate Change into Account

  • Max FranksEmail author
  • Ottmar Edenhofer
  • Kai Lessmann


Fiscal considerations may shift governmental priorities away from environmental concerns: finance ministers face strong demand for public expenditures such as infrastructure investments but they are constrained by international tax competition. We develop a multi-region model of tax competition and resource extraction to assess the fiscal incentive of imposing a tax on carbon rather than on capital. We explicitly model international capital and resource markets, as well as intertemporal capital accumulation and resource extraction. While fossil resources give rise to scarcity rents, capital does not. With carbon taxes, the rents can be captured and invested in infrastructure, which leads to higher welfare than under capital taxation. This result holds even without modeling environmental damages. It is robust under a variation of the behavioral assumptions of resource importers to coordinate their actions, and a resource exporter’s ability to counteract carbon policies. Further, no green paradox occurs—instead, the carbon tax constitutes a viable green policy, since it postpones extraction and reduces cumulative emissions.


Carbon pricing Green paradox Infrastructure Optimal taxation Strategic instrument choice Supply-side dynamics Tax competition 

JEL Classification

F21 H21 H30 H73 Q38 



We thank Patrick Doupé, Beatriz Gaitan, Ulrike Kornek, Linus Mattauch, Warwick McKibben, Gregor Schwerhoff, Sjak Smulders, Iris Staub-Kaminski, the CREW project members, in particular Marco Runkel and Karl Zimmermann, the participants of the FEEM workshop on Climate Change and Public Goods 2014, the GGKP Annual Conference 2015, the Annual Conference of the Royal Economic Society 2015, as well as the RD3 PhD seminars at PIK, and two anonymous referees for useful comments and fruitful discussions. Max Franks and Kai Lessmann received funding from the German Federal Ministry for Education and Research (BMBF promotion references 01LA1121A), which is gratefully acknowledged.

Compliance with Ethical Standards

Conflict of interest

The authors declare that they have no conflict of interest.


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Copyright information

© Springer Science+Business Media Dordrecht 2015

Authors and Affiliations

  1. 1.Potsdam Institute for Climate Impact ResearchPotsdamGermany
  2. 2.Berlin Institute of TechnologyBerlinGermany
  3. 3.Mercator Research Institute on Global Commons and Climate ChangeBerlinGermany

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