Climate change has emerged as a leading environmental concern in recent years. The two widely discussed and debated options for abatement of greenhouse gas (GHG) emissions are a cap-and-trade system, at the level of producers, and an emissions tax. More interesting is the question of capping (and trading) at the level of individual households. Regardless of policy pursued, a key concern in implementing such policies relates to equity: stakeholders wish to understand the distributional or effects, whereby poorer households may be disproportionally impacted. In this paper, household expenditure data from the U.S. Consumer Expenditure Survey are used to anticipate the economic impacts of energy taxes versus household-level emissions caps (with buy-out permitted, for those who exceed their budget) across different income classes and different types of expenditures, including those on transport. A translog utility model was calibrated to estimate demand quantities under two different tax rates and four different cap-andtrade scenarios. While the 9-category demand system does not allow for likely consumption shifts (toward less energy-intensive items) within each demand category, the model still provided

For reducing greenhouse gas emissions, intensity targets are attracting interest as a flexible mechanism that would better allow for economic growth than emissions caps. For the same expected emissions, however, the economic responses to unexpected productivity shocks differ. Using a real business cycle model, we find that a cap dampens the effects of productivity shocks in the economy. An emissions tax leads to the same expected outcomes as a cap but with greater volatility. Certaintyequivalent intensity targets maintain higher levels of labor, capital, and output than other policies, with lower expected costs and no more volatility than with no policy.

Noting that South Africa may be one of the few African countries that could contribute to mitigating climate change, the authors explore the impact of a carbon tax relative to alternative energy taxes on economic welfare. Using a disaggregate general-equilibrium model of the South African economy, they capture the structural characteristics of the energy sector, linking a supply mix that is heavily skewed toward coal to energy use by different sectors and hence their carbon content. The authors consider a “pure ” carbon tax as well as various proxy taxes such as those on energy or energy-intensive sectors like transport and basic metals, all of which achieve the same level of carbon reduction. In general, the more targeted the tax to carbon emissions, the better the welfare results. If a carbon tax is feasible, it will have the least marginal cost of abatement by a substantial amount when compared to alternative tax instruments. If a carbon tax is not feasible, a sales tax on energy inputs is the next best option. Moreover, labor market distortions such as labor market segmentation or unemployment will likely dominate the welfare and equity implications of a carbon tax for South Africa. This being the case, if South Africa were able to remove some of the distortions in the labor market, the cost of carbon taxation would be negligible. In short, the discussion of carbon taxation in South Africa can focus on considerations other than the economic welfare costs, which are likely to be quite low.

Developed countries must take the lead in combating climate change. But mitigation will be neither effective nor efficient without abatement efforts in developing countries. Those are two key messages of earlier chapters. But there is a critical third dimension to meeting the climate challenge: equity. An equitable approach to limiting global emissions of greenhouse gases has to recognize that developing countries have legitimate development needs, that their development may be jeopardized by climate change, and that they have contributed little, historically, to the problem.