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Adjusting Carbon Cost Analyses to Account for Prior Tax Distortions

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  • Parry, Ian

    (Resources for the Future)

Abstract

This paper discusses how carbon abatement policies interact with the tax system, and how these interactions affect the overall costs of carbon controls. We provide formulas for adjusting cost estimates of auctioned and grandfathered carbon emissions from partial equilibrium energy models into rough estimates of general equilibrium costs that account for fiscal interactions. In the basic model with a tax on labor income, the general equilibrium costs of (revenue-neutral) auctioned permits are around 25% higher than the partial equilibrium costs; those of grandfathered permits, which do not directly raise revenues for recycling, are typically more than 100% higher. However, when allowance is made for complicating factors, such as the effect of tax subsidies on raising the distortionary costs of the tax system, the efficiency gains from recycling revenues from auctioned permits are larger. Indeed the general equilibrium costs of (revenue-neutral) auctioned permits can be negative for modest abatement levels.

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  • Parry, Ian, 2002. "Adjusting Carbon Cost Analyses to Account for Prior Tax Distortions," RFF Working Paper Series dp-02-47, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-02-47
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    Cited by:

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    2. Bourne, M. & Philippidis, G. & Quiroga, S. & Fernandez-Haddad, Z., 2013. "Kyoto and Mañana: A CGE analysis of Spanish Greenhouse Gas targets to 2020," Conference papers 332344, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Childs, Jack, 2012. "Kyoto and the EU CEP 2020: A Dynamic Study of the impacts on the Agricultural Sector in Spain," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 135074, Agricultural Economics Society.

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    More about this item

    Keywords

    carbon permits; tax distortions; revenue recycling; general equilibrium costs;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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