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The year 2020 marks the centennial of the publication of Arthur Cecil Pigou's magnum opus The Economics of Welfare. Pigou's pricing principles have had an enduring influence on the academic debate, with a widespread consensus having emerged among economists that Pigouvian taxes or subsidies are theoretically desirable, but politically infeasible. In this article, we revisit Pigou's contribution and argue that this consensus is somewhat spurious, particularly in two ways: (1) Economists are too quick to ignore the theoretical problems and subtleties that Pigouvian pricing still faces; (2) The wholesale skepticism concerning the political viability of Pigouvian pricing is at odds with its recent practical achievements. These two points are made by, first, outlining the theoretical and political challenges that include uncertainty about the social cost of carbon, the unclear relationship between the cost–benefit and cost-effectiveness approaches, distributional concerns, fragmented ministerial responsibilities, an unstable tax base, commitment problems, lack of acceptance and trust between government and citizens as well as incomplete international cooperation. Secondly, we discuss the recent political success of Pigouvian pricing, as evidenced by the German government's 2019 climate policy reform and the EU's Green Deal. We conclude by presenting a research agenda for addressing the remaining barriers that need to be overcome to make Pigouvian pricing a common political practice.

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.

Germany has an ambitious climate target for 2030 that cannot be achieved without reducing the high share of coal in power generation. In the face of this, the government has recently decided to directly phase out coal capacity. Yet implementing such a policy comes with two important risks: (1) the decommissioning path might actually be insufficient to reach the 2030 climate target; and (2) the waterbed effect that arises from any additional national policy within the EU Emissions Trading Scheme (EU ETS) cap. In this paper, we quantify these risks using the numerical electricity market model LIMES-EU, and consider options for dealing with them. Our results show that the coal capacity phase out risks missing the 2030 target slightly, but a carbon price floor of at least 35 €/tCO2 would eliminate this risk. Further, we find a substantial waterbed effect, which could be partly alleviated through a carbon price floor coalition of countries, and even fully by cancelling 1.1 GtCO2 of certificates. Yet given the difficulties and challenges that come with either option, members implementing a carbon price floor policy should advocate extending it to the full EU ETS level.

Hinreichend ambitionierte CO2‐Preise lenken Realinvestitionen grundsätzlich in die richtige Richtung. Wenn deren Einführung der Politik jedoch nicht gelingt, bedarf es anderer Instrumente, um eine Fehlallokation von Kapital zu verhindern. Wir schlagen daher im Zuge des europäischen Green Deals einen Investitionsfonds für die EU vor, der sich durch langfristige, staatlich gesicherte Anleihen finanziert, um langfristig (zins)verbilligte Kredite an Unternehmen zu vergeben, die in nachhaltige Projekte mit dem primären Ziel der Treibhausgasneutralität investieren. Diese Subventionierung soll so lange Anreize für CO2‐vermeidende Investitionen setzen, bis ein ausreichend hoher CO2‐Preis eingeführt ist. Für Unternehmen ergeben sich so Anreize, ihre Geschäftsmodelle nachhaltiger zu gestalten und den Transformationsprozess der Wirtschaft umzusetzen.

We estimate the cumulative future emissions expected to be released by coal power plants that are currently under construction, announced, or planned. Even though coal consumption has recently declined and plans to build new coal-fired capacities have been shelved, constructing all these planned coal-fired power plants would endanger national and international climate targets. Plans to build new coal-fired power capacity would likely undermine the credibility of some countries' (Intended) Nationally Determined Contributions submitted to the UNFCCC. If all the coal-fired power plants that are currently planned were built, the carbon budget for reaching the 2 °C temperature target would nearly be depleted. Propositions about 'coal's terminal decline' may thereby be premature. The phase-out of coal requires dedicated and well-designed policies. We discuss the political economy of policy options that could avoid a continued build-up of coal-fired power plants.

By taxing rents, governments can avoid a trade-off between productivity-enhancing public investment and efficiency losses from raising funds. However, it is unclear whether the rents present in a growing economy are sufficient to finance the socially optimal investment. We prove that the social optimum can be attained if the income share from a fixed factor, such as land, exceeds the public investment requirement. We thus translate the Henry George Theorem from urban economics to neoclassical and endogenous growth settings: here, the socially optimal land rent tax rate is below 100%. Our finding may address the underfunding of national infrastructure investments.

Empirical evidence shows that low-income households spend a high share of their income on pollution-intensive goods. This fuels the concern that an environmental tax reform could be regressive. We employ a framework which accounts for the distributional effect of environmental taxes and the recycling of the revenues on both households and firms to quantify changes in the optimal tax structure and the equity impacts of an environmental tax reform. We characterize when an optimal environmental tax reform does not increase inequality, even if the tax system before the reform is optimal from a non-environmental point of view. If the tax system before the reform is calibrated to stylized data—and is thus non-optimal—we find that there is a large scope for inequality reduction, even if the government is restricted in its recycling options.

Wealth inequality is a major political concern in most OECD countries. Under this premise, we analyze different policy instruments in terms of their impact on wealth inequality and output. In a general equilibrium model, we disaggregate wealth in its capital and land components, and savings in their life-cycle and bequest components. Households are heterogeneous in their taste for leaving bequests. We show that governments have considerable freedom in reducing wealth inequality without sacrificing output: Land rent taxes enhance output due to a portfolio effect and reduce wealth inequality slightly. Bequest taxes have the highest potential to reduce inequality, and their effect on output is moderate. By contrast, we confirm the standard result that capital taxes reduce output strongly and show that they only have moderate redistributive effects. Furthermore, we find that using the tax proceeds for transfers to the young generations enhances output the most and further reduces wealth inequality.

The Paris Agreement's very ambitious mitigation goals, notably to 'pursue efforts' to limit warming to 1.5°C, imply that climate policy will remain a national affair for some time. One key obstacle to very ambitious national mitigation is that some policy makers perceive this to be in competition with major goals of fiscal policy, such as public investment or debt reduction. However, climate policy may actually contribute to these other objectives. Importantly, many fiscal implications of substantial carbon prices, which are essential for stringent mitigation targets such as the 1.5°C goal, have long been neglected by economic analyses of climate change mitigation. We systematically review recent contributions on interactions between climate policy and public finance, which include many topics beyond the classic `double dividend' of environmental tax swaps. We can thus identify new conclusions about climate policy designs that may overcome fiscal objections and research gaps. We find that national climate policy often aligns with other objectives, provided that climate policies and fiscal policies are integrated well. A first class of interactions concerns public revenue-raising: carbon pricing can replace distortionary taxes and alleviate international tax competition; climate policy also changes asset values, which impacts the base of non-climate taxes and boosts productive investment. Second, they concern public spending, which needs to be restructured as a part of climate policy, while carbon pricing revenues may be recycled for public investment. Third, distributional impacts of climate policies include changes to household expenditures, to asset values and to employment; balancing them often requires fiscal policies. Our findings underline that jointly considering climate policy and fiscal policy can help to make substantial mitigation politically feasible.

The Paris Agreement's very ambitious mitigation goals, notably to 'pursue efforts' to limit warming to 1.5°C, imply that climate policy will remain a national affair for some time. One key obstacle to very ambitious national mitigation is that some policy makers perceive this to be in competition with major goals of fiscal policy, such as public investment or debt reduction. However, climate policy may actually contribute to these other objectives. Importantly, many fiscal implications of substantial carbon prices, which are essential for stringent mitigation targets such as the 1.5°C goal, have long been neglected by economic analyses of climate change mitigation. We systematically review recent contributions on interactions between climate policy and public finance, which include many topics beyond the classic `double dividend' of environmental tax swaps. We can thus identify new conclusions about climate policy designs that may overcome fiscal objections and research gaps. We find that national climate policy often aligns with other objectives, provided that climate policies and fiscal policies are integrated well. A first class of interactions concerns public revenue-raising: carbon pricing can replace distortionary taxes and alleviate international tax competition; climate policy also changes asset values, which impacts the base of non-climate taxes and boosts productive investment. Second, they concern public spending, which needs to be restructured as a part of climate policy, while carbon pricing revenues may be recycled for public investment. Third, distributional impacts of climate policies include changes to household expenditures, to asset values and to employment; balancing them often requires fiscal policies. Our findings underline that jointly considering climate policy and fiscal policy can help to make substantial mitigation politically feasible.

The gap between actual carbon prices and those required to achieve ambitious climate change mitigation could be closed by enhancing the public acceptability of carbon pricing through appropriate use of the revenues raised. In this Perspective, we synthesize findings regarding the optimal use of carbon revenues from both traditional economic analyses and studies in behavioural and political science that are focused on public acceptability. We then compare real-world carbon pricing regimes with theoretical insights on distributional fairness, revenue salience, political trust and policy stability. We argue that traditional economic lessons on efficiency and equity are subsidiary to the primary challenge of garnering greater political acceptability and make recommendations for enhancing political support through appropriate revenue uses in different economic and political circumstances.

Die Kommission hat ihr "Fit For 55" Paket vorgelegt, welches das 55%-Reduktionsziel für 2030 wie folgt auf die Sektoren aufteilt: Die Sektoren im bestehenden EU-Emissionshandelssystem (ETS), also hauptsächlich Strom und Industrie, sollen ihre Emissionen um 61% gegenüber 2005 mindern. Alle anderen Sektoren fallen unter die Effort Sharing Regulation (ESR) und sollen ihre Emissionen um 40% gegenüber 2005 mindern. In diesem Papier analysieren wir die notwendigen CO2-Preise zur Zielerreichung unter der Annahme, dass eine Bepreisung von CO2 das einzige Instrument der Emissionsminderung ist. Werden weitere Politikinstrumente eingesetzt, zum Beispiel Technologiestandards, dann können zwar die CO2-Preise abgesenkt und die Verteilung der Vermeidungskosten auf Haushalte und Unternehmen verändert werden; jedoch kann das Niveau der gesamtwirtschaftlichen Vermeidungskosten nur dann vermindert werden, wenn die zusätzlichen Politikinstrumente bestehende Marktversagen verringern und dabei nicht mehr neue Ineffizienzen schaffen. Die notwendigen CO2-Preise im Jahre 2030 erreichen dabei 275 EUR/t in den ESR-Sektoren (Bandbreite: 210-405 EUR/t). Diese Preise sind mehr als doppelt so hoch wie die für das ETS-Ziel notwendigen CO2-Preise (130 EUR/t, Bandbreite 95-210 EUR/t). Allerdings wird die Höhe der notwendigen CO2-Preise maßgeblich davon beeinflusst, a) wie die Emissionsminderungen zwischen ETS und ESR aufgeteilt werden, b) wie schnell der Markthochlauf emissionsfreier Technologien – insbesondere der Elektromobilität – realisiert wird und wie schnell Wind- und Solarstrom ausgebaut, sowie die notwendigen Flexibilitäten im Stromsystem durch Netzausbau, Speicher und Lastmanagement bereitgestellt werden können. Für den Fall, dass der ETS 50% der zusätzlichen Minderungen des ESR übernimmt, gleichen sich beide Preise stark an: 190 EUR/t im ETS und 195 EUR/t in der ESR. Für die Politikinstrumente ergeben sich zwei Schlussfolgerungen: Ein höherer Vermeidungsbeitrag der ETS-Sektoren könnte die CO2-Preise angleichen, und somit das 2030-Ziel kostengünstiger erreichen. Allerdings könnte eine solche Aufteilung auch zu sehr hohen ESR-CO2-Preisen zu einem späteren Zeitpunkt führen, falls kurzfristig niedrigere CO2-Preise in den ESR-Sektoren den Markthochlauf emissionsfreier Technologien ausbremsen. Dies wird aber nur dann der Fall sein, wenn der langfristige Pfad der CO2-Preise von den Investoren als nicht glaubwürdig wahrgenommen wird. Die Kostenersparnisse hängen sowohl von den Erwartungen der Investoren als auch davon ab, welche zusätzlichen Maßnahmen noch auf europäischer und nationaler Ebene implementiert werden, die die Glaubwürdigkeit der langfristigen Zielerreichung stärken. Die große Bandbreite der notwendigen CO2-Preise je nach Annahmen zum Markthochlauf zeigt die Bedeutung von komplementärem Infrastrukturausbau und Technologiepolitik. So könnten beispielsweise der Ausbau der Ladeinfrastruktur und Investitionsanreize den Markthochlauf emissionsfreier Technologien fördern. Solche Maßnahmen – wie sie auch im Fit-for-55 Paket der EU Kommision vorgesehen sind – können bestehende Marktversagen korrigieren und so den notwendigen CO2-Preis senken sowie die Sicherheit der Klimazielerreichung erhöhen. Allerdings gehen diese Maßnahmen oftmals mit versteckten Kosten einher, und ein sozialer Ausgleich ist zudem schwerer möglich, da keine Einnahmen aus der CO2-Bepreisung zur Verfügung stehen.

Climate policy needs to account for political and social acceptance. Current national climate policy plans proposed under the Paris Agreement lead to higher emissions until 2030 than cost-effective pathways towards the Agreements' long-term temperature goals would imply. Therefore, the current plans would require highly disruptive changes, prohibitive transition speeds, and large long-term deployment of risky mitigation measures for achieving the agreement's temperature goals after 2030. Since the prospects of introducing the cost-effective policy instrument, a global comprehensive carbon price in the near-term, are negligible, we study how a strengthening of existing plans by a global roll-out of regional policies can ease the implementation challenge of reaching the Paris temperature goals. The regional policies comprise a bundle of regulatory policies in energy supply, transport, buildings, industry, and land use and moderate, regionally differentiated carbon pricing. We find that a global roll-out of these policies could reduce global CO2 emissions by an additional 10 GtCO2eq in 2030 compared to current plans. It would lead to emissions pathways close to the levels of cost-effective likely below 2 °C scenarios until 2030, thereby reducing implementation challenges post 2030. Even though a gradual phase-in of a portfolio of regulatory policies might be less disruptive than immediate cost-effective carbon pricing, it would perform worse in other dimensions. In particular, it leads to higher economic impacts that could become major obstacles in the long-term. Hence, such policy packages should not be viewed as alternatives to carbon pricing, but rather as complements that provide entry points to achieve the Paris climate goals.