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Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions

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Author Info
Lawrence H. Goulder
Ian W.H. Parry
Dallas Burtraw

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Abstract

Using analytical and numerical general equilibrium models, we show that preexisting factor taxes produce a "tax-interaction effect" that increases the costs of pollution taxes and quotas. Under policies that raise revenue and recycle it through cuts in marginal factor tax rates, this effect is partially offset by a "revenue-recycling effect." Grandfathered pollution quotas, such as those used under the 1990 Clean Air Act Amendments to regulate electric utilities' SO2 emissions, do not benefit from this offset. Preexisting taxes raise this regulation's cost by over 70%. More than half of this additional cost could be avoided by auctioning quotas and exploiting the revenue-recycling effect.

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File URL: http://links.jstor.org/sici?sici=0741-6261%28199724%2928%3A4%3C708%3ARVOATE%3E2.0.CO%3B2-J&origin=repec
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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 28 (1997)
Issue (Month): 4 (Winter)
Pages: 708-731
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Handle: RePEc:rje:randje:v:28:y:1997:i:winter:p:708-731

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  1. Thomas Conefrey & John Fitz Gerald & Laura Malaguzzi Valeri & Richard S. J. Tol, 2008. "The Impact of a Carbon Tax on Economic Growth and Carbon Dioxide Emissions in Ireland," Papers WP251, Economic and Social Research Institute (ESRI). [Downloadable!]
  2. John Pezzey, 2003. "Emission Taxes and Tradeable Permits A Comparison of Views on Long-Run Efficiency," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(2), pages 329-342, October. [Downloadable!] (restricted)
  3. Montero, J-P., 2004. "Pollution Markets with Imperfectly Observed Emissions," Cambridge Working Papers in Economics 0456, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  4. A. Bigano & S. Proost & J. Van Rompuy, 2000. "Alternative Environmental Regulation Schemes for the Belgian Power Generation Sector," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(2), pages 121-160, June. [Downloadable!] (restricted)
  5. Anthony Letsoalo & James Blignaut & Theuns de Wet & Martin de Wit & Sebastiaan Hess & Richard S.J. Tol & Jan van Heerden, 2005. "Triple Dividends Of Water Consumption Charges In South Africa," Working Papers FNU-62, Research unit Sustainability and Global Change, Hamburg University, revised Apr 2005. [Downloadable!]
  6. Simpson, R. David & Ferraro, Paul, 2000. "The Cost-Effectiveness of Conservation Payments," Discussion Papers dp-00-31, Resources For the Future. [Downloadable!]
  7. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Jean-Christophe Caffet, 2005. "Health effects and optimal environmental taxes in welfare state countries," Cahiers de la Maison des Sciences Economiques v05049, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  9. Sang-Ho Lee & Iltae Kim, 2000. "Self-Selection and Optimal Nonlinear Effluent Charges," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(1), pages 1-14, May. [Downloadable!] (restricted)
  10. Calthrop, Edward, 2001. "On Subsidising Auto-Commuting," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. John C. V. Pezzey, 2002. "EmissionTaxes and Tradable Permits: A Comparison of views on Long Run Efficiency," Economics and Environment Network Working Papers 0210, Australian National University, Economics and Environment Network. [Downloadable!]
  12. Burtraw, Dallas & Evans, David A., 2008. "Tradable Rights to Emit Air Pollution," Discussion Papers dp-08-08, Resources For the Future. [Downloadable!]
  13. Juan Pablo Montero, 2004. "Markets for Environmental Protection; Desing and Performance," Documentos de Trabajo 269, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  14. Roger H. Gordon & John D. Wilson, 1999. "Tax Structure and Government Behavior: Implications for Tax Policy," NBER Working Papers 7244, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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