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The Design of a Carbon Tax

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  • Gilbert Metcalf
  • David Weisbach

Abstract

We consider the design of a tax on greenhouse gas emissions for a developed country such as the United States. We consider three sets of issues: the optimal tax base, issues relating to the rate (including the use of the revenues and rate changes over time) and trade. We show that a well-designed carbon tax can capture about 80% of U.S. emissions by taxing fewer than 3,000 taxpayers and up to almost 90% with a modest additional cost. We recommend full or partial delegation of rate setting authority to an agency to ensure that rates reflect new information about the costs of carbon emmissions and of abatement. Adjustments should be made to the income tax to ensure that a carbon tax is revenue neutral and distributionally neutral. Finally, we propose an origin-based system for trades with countries that have an adequate carbon tax. We suggest a system that imposes presumptive border tax adjustments with the ability of an individual firm to prove that a different rate should apply. The presumptive tax could be based either on average emissions for production of the item by the exporting country or by the importing country.

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Bibliographic Info

Paper provided by Department of Economics, Tufts University in its series Discussion Papers Series, Department of Economics, Tufts University with number 0727.

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Date of creation: 2008
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Handle: RePEc:tuf:tuftec:0727

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Postal: Medford, MA 02155, USA
Phone: (617) 627-3560
Fax: (617) 627-3917
Web page: http://ase.tufts.edu/econ

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References

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  2. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Taxes and the Double Dividends Hypothesis: Did You Really Expect Something for Nothing?," Discussion Papers Series, Department of Economics, Tufts University 9706, Department of Economics, Tufts University.
  3. Gilbert Metcalf, 2007. "Policy Options for Controlling Greenhouse Gas Emissions: Implications for Agriculture," Discussion Papers Series, Department of Economics, Tufts University 0710, Department of Economics, Tufts University.
  4. S. Paltsev & J. Reilly & H. Jacoby & A. Gurgel & G. Metcalf & A. Sokolov & J. Holak, 2007. "Assessment of U.S. Cap-and-Trade Proposals," Working Papers 0705, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  5. Louis Kaplow & Steven Shavell, 1999. "Economic Analysis of Law," NBER Working Papers 6960, National Bureau of Economic Research, Inc.
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  7. Kevin A. Hassett & Aparna Mathur & Gilbert E. Metcalf, 2009. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 155-178.
  8. Babiker, Mustafa H., 2005. "Climate change policy, market structure, and carbon leakage," Journal of International Economics, Elsevier, vol. 65(2), pages 421-445, March.
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  13. Gilbert E. Metcalf, 2006. "Federal Tax Policy Towards Energy," Discussion Papers Series, Department of Economics, Tufts University 0612, Department of Economics, Tufts University.
  14. Curtis Carlson & Gilbert Metcalf, 2008. "Energy Tax Incentives and the Alternative Minimum Tax," Discussion Papers Series, Department of Economics, Tufts University 0722, Department of Economics, Tufts University.
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  22. Parry, Ian & Small, Kenneth, 2002. "Does Britain or the United States Have the Right Gasoline Tax?," Discussion Papers dp-02-12-, Resources For the Future.
  23. Gilbert E. Metcalf & Sergey Paltsev & John Reilly & Henry Jacoby & Jennifer F. Holak, 2008. "Analysis of U.S. Greenhouse Gas Tax Proposals," NBER Working Papers 13980, National Bureau of Economic Research, Inc.
  24. Larry Karp & Jiangfeng Zhang, 2005. "Regulation of Stock Externalities with Correlated Abatement Costs," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(2), pages 273-300, October.
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  26. Kaplow, Louis, 2006. "On the undesirability of commodity taxation even when income taxation is not optimal," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1235-1250, August.
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Citations

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Cited by:
  1. Arik Levinson, 2010. "Belts and Suspenders: Interactions Among Climate Policy Regulations," NBER Working Papers 16109, National Bureau of Economic Research, Inc.
  2. Panzone, Luca A., 2013. "Saving money vs investing money: Do energy ratings influence consumer demand for energy efficient goods?," Energy Economics, Elsevier, vol. 38(C), pages 51-63.
  3. Erin T. Mansur, 2010. "Upstream versus Downstream Implementation of Climate Policy," NBER Working Papers 16116, National Bureau of Economic Research, Inc.
  4. Kathy Baylis & Don Fullerton & Daniel H. Karney, 2013. "Leakage, Welfare, and Cost-Effectiveness of Carbon Policy," NBER Working Papers 18898, National Bureau of Economic Research, Inc.
  5. Gilbert E. Metcalf, 2009. "Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 63-83, Winter.
  6. Liu, Antung Anthony, 2012. "Tax Evasion and Optimal Environmental Taxes," Discussion Papers dp-12-37, Resources For the Future.
  7. Ley, Eduardo & Boccardo, Jessica, 2010. "The taxation of motor fuel : international comparison," Policy Research Working Paper Series 5212, The World Bank.
  8. Gary D. Libecap, 2013. "Addressing Global Environmental Externalities: Transaction Costs Considerations," NBER Working Papers 19501, National Bureau of Economic Research, Inc.
  9. Alfredo Marvão Pereira & Rui M. Pereira, 2014. "What is it going to take to achieve 2020 Emission Targets? Marginal abatement cost curves and the budgetary impact of CO2 taxation in Portugal (," Working Papers 105, Department of Economics, College of William and Mary.
  10. Liu, Antung Anthony, 2013. "Tax evasion and optimal environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 656-670.
  11. Gilbert E. Metcalf, 2009. "Market-Based Policy Options to Control U.S. Greenhouse Gas Emissions," Journal of Economic Perspectives, American Economic Association, vol. 23(2), pages 5-27, Spring.
  12. Joshua Elliott & Ian Foster & Samuel Kortum & Todd Munson & Fernando Pérez Cervantes & David Weisbach, 2010. "Trade and Carbon Taxes," American Economic Review, American Economic Association, vol. 100(2), pages 465-69, May.
  13. Alfredo Marvão Pereira & Rui M. Pereira, 2013. "Environmental Fiscal Reform and Fiscal Consolidation: The Quest for the Third Dividend in Portugal," Working Papers 114, Department of Economics, College of William and Mary.

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