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Climate Policy and Fiscal Constraints: Do Tax Interactions Outweigh Carbon Leakage?

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  • Fischer, Carolyn

    ()
    (Resources for the Future)

  • Fox, Alan K.

Abstract

Climate policymaking faces twin challenges of carbon leakage and public sector revenue requirements. A large literature advocates the use of carbon dioxide (CO2) pricing and recycling the revenues to lower distorting taxes as a way to minimize costs. In this paper, we explore the implications of labor tax interactions for the cost-effectiveness of border adjustments and other measures to cope with leakage. We find that, for plausible values of labor supply elasticities, the cost savings from revenue recycling are significant—from 15 to 25 percent. The cost savings from anti-leakage measures are generally smaller, but also significant, particularly for small coalitions or more binding reduction targets. Tax interactions further enhance the cost savings from border adjustments, but make other measures like rebates or exemptions less attractive.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-12-19.

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Date of creation: 23 Aug 2012
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Handle: RePEc:rff:dpaper:dp-12-19

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Keywords: climate policy; carbon leakage; tax interactions; border adjustments;

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  1. Bernard, Alain L. & Fischer, Carolyn & Fox, Alan K., 2007. "Is there a rationale for output-based rebating of environmental levies?," Resource and Energy Economics, Elsevier, vol. 29(2), pages 83-101, May.
  2. Michiel Evers & Ruud A. de Mooij & Daniel J. van Vuuren, 2006. "What explains the Variation in Estimates of Labour Supply Elasticities?," Tinbergen Institute Discussion Papers 06-017/3, Tinbergen Institute.
  3. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
  4. Mustafa H. Babiker & Thomas F. Rutherford, 2005. "The Economic Effects of Border Measures in Subglobal Climate Agreements," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 99-126.
  5. Ian W.H. Parry & Roberton C. Williams III, 2010. "What Are the Costs of Meeting Distributional Objectives for Climate Policy?," NBER Working Papers 16486, National Bureau of Economic Research, Inc.
  6. repec:old:wpaper:346 is not listed on IDEAS
  7. Sergey V. Paltsev, 2001. "The Kyoto Protocol: Regional and Sectoral Contributions to the Carbon Leakage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 53-80.
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Cited by:
  1. Christoph Böhringer & André Müller & Jan Schneider, 2014. "Carbon Tariffs Revisited," CESifo Working Paper Series 4720, CESifo Group Munich.
  2. Christoph Böhringer & André Müller & Jan Schneider, 2014. "Carbon Tariffs Revisited," Working Papers V-364-14, University of Oldenburg, Department of Economics, revised Jan 2014.

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