Consumers, industrialists and the political economy of green taxation: CO2 taxation in OECD

Economists have traditionally suggested that politicians should simply impose a uniform tax on harmful emissions, as the first-best solution prescribes. However, a detailed analysis of the actual design of green taxes in the OECD reveals that they are differentiated and far from this first-best optimal design. Public choice theory suggests that an important reason that industry as a group, in contrast to households, is capable of lobbying against green taxation. The paper presents empirical findings on CO2 taxation within the OECD countries, which confirm this theoretical prediction. Taxes are not uniform, and households pay a tax rate which is six times higher than that paid by the industry on average. Even when tax revenue is fully refunded to industry, the potential losers (energy-intensive firms) will lobby harder against it than the potential winners (labor-intensive firms) due to small-group advantages. The Norwegian case confirms these arguments. Finally, it is suggested that a CO2 tax may, perhaps, successfully be applied to households, because they tend to be badly organized. As such, a mix of green taxes (in relation to non-organized interests) and grandfathered permit markets (in relation to organized interests) should be considered in the search for cost-effective and politically feasible instruments.