Combating Climate Change through Policy Instruments. A Meta-Analysis of Carbon Taxation

Recently, there has been a surge of interest in policies that target climate change. This paper begins by discussing why policymakers, and central banks in particular, should be concerned about climate change, and goes on to argue why carbon pricing is an appropriate political instrument to reduce greenhouse gas (GHG) emissions. The paper details two categories of carbon pricing, namely carbon taxation and the introduction of Emission Trading Systems (ETSs), illustrating why a carbon tax is the more efficient instrument. Popular models for optimal carbon taxation and implications of carbon taxation are discussed. The paper concludes with recommendations to policymakers, which include advocacy of differentiated rather than uniform carbon taxation, phased-in carbon taxation instead of a blanket approach, introduction of the carbon border adjustment mechanism (CBAM), and Green Quantitative Easing (QE).