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Carbon abatement in the fuel market with biofuels: Implications for second best policies

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  • Crago, Christine Lasco
  • Khanna, Madhu

Abstract

A carbon tax on fuel would penalize carbon intensive fuels like gasoline and shift fuel consumption to less carbon intensive alternatives like biofuels. Since biofuel production competes for land with agricultural production, a carbon tax could increase land rents and raise food prices. This paper analyzes the welfare effect of a carbon tax on fuel consisting of gasoline and biofuel in the presence of a labor tax, with and without a biofuel subsidy. The market impacts of a carbon tax are also compared with that of a subsidy. Findings show that if a carbon tax increases biofuel demand, the tax interaction effect due to higher fuel prices is exacerbated by higher land rent and food prices and greater erosion of the carbon tax base. Thus, the second best optimal carbon tax for fuel is lower with biofuel in the fuel mix, especially if biofuel is subsidized.

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  • Crago, Christine Lasco & Khanna, Madhu, 2014. "Carbon abatement in the fuel market with biofuels: Implications for second best policies," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 89-103.
    • Handle: RePEc:eee:jeeman:v:67:y:2014:i:2:p:89-103
    DOI: 10.1016/j.jeem.2013.11.001
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    Cited by:

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    More about this item

    Keywords

    Carbon tax; Optimal fuel tax; Biofuel; Second best policy;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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