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Environmental Policy in General Equilibrium: New Insights from a Canonical Model

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  • Cloé Garnache
  • Pierre Mérel

Abstract

This paper derives the incidence of a pollution tax in a stylized general equilibrium framework, building on previous work by Fullerton and Heutel (2007a). Using the CPI as numeraire, we show that tax incidence is a simpler problem than previously thought, and that general insights can be derived without the need to restrict the parameter space. In addition, the counterintuitive possibility that an increase in the tax could increase the pollution level vanishes. The choice of the CPI as numeraire is further justified by the fact that environmental taxes, notably carbon taxes, are typically indexed on inflation.

Suggested Citation

  • Cloé Garnache & Pierre Mérel, 2020. "Environmental Policy in General Equilibrium: New Insights from a Canonical Model," CESifo Working Paper Series 8354, CESifo.
    • Handle: RePEc:ces:ceswps:_8354
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    References listed on IDEAS

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    4. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association, vol. 50(1), pages 59-88, March.
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    6. Fullerton Don & Heutel Garth, 2011. "Analytical General Equilibrium Effects of Energy Policy on Output and Factor Prices," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-26, January.
    7. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215-215.
    8. Lawrence H. Goulder & Marc A. C. Hafstead & Roberton C. Williams III, 2016. "General Equilibrium Impacts of a Federal Clean Energy Standard," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 186-218, May.
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    15. Bovenberg, A. Lans & Goulder, Lawrence H., 1997. "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(1), pages 59-88, March.
    16. Don Fullerton & Garth Heutel & Gilbert E. Metcalf, 2012. "Does the Indexing of Government Transfers Make Carbon Pricing Progressive?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(2), pages 347-353.
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    Cited by:

    1. Heutel, Garth & Zhang, Xin, 2021. "Efficiency wages, unemployment, and environmental policy," Energy Economics, Elsevier, vol. 104(C).

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    More about this item

    Keywords

    tax incidence; general equilibrium; relative prices; numeraire;
    All these keywords.

    JEL classification:

    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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