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Fiscal Interactions and the Case for Carbon Taxes Over Grandfathered Carbon Permits

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Author Info
Ian W. H. Parry

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Abstract

This paper provides simple formulas for adjusting the costs of carbon taxes and tradable carbon permits to account for interactions with pre-existing tax distortions in the labour market. Both policies reduce labour supply as they increase product prices and reduce real household wages; the resulting efficiency losses in the labour market can be substantial relative to partial equilibrium abatement costs. However, much of this added cost can be offset, and perhaps more than offset when additional distortions from the tax system are considered, if revenues from carbon taxes or auctioned permits are used to reduce distortionary taxes. Consequently, there can be a strong case on efficiency grounds for using carbon taxes or auctioned permits over grandfathered carbon permits. Copyright 2003, Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 19 (2003)
Issue (Month): 3 ()
Pages: 385-399
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Handle: RePEc:oup:oxford:v:19:y:2003:i:3:p:385-399

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lawrence H. Goulder & Marc A. C. Hafstead & Michael S. Dworsky, 2009. "Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program," NBER Working Papers 15293, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Aldy, Joseph E. & Pizer, William A., 2008. "Issues in Designing U.S. Climate Change Policy," Discussion Papers dp-08-20, Resources For the Future. [Downloadable!]
  3. Alfred Endres & Cornelia Ohl, 2005. "Kyoto, Europe?—An Economic Evaluation of the European Emission Trading Directive," European Journal of Law and Economics, Springer, vol. 19(1), pages 17-39, January. [Downloadable!] (restricted)
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