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Climate policy and fiscal constraints: Do tax interactions outweigh carbon leakage?

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  • Fischer, Carolyn
  • Fox, Alan K.

Abstract

Climate policymaking faces twin challenges of carbon leakage and public sector revenue requirements. A large literature advocates the use of 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 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%. 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.

Suggested Citation

  • Fischer, Carolyn & Fox, Alan K., 2012. "Climate policy and fiscal constraints: Do tax interactions outweigh carbon leakage?," Energy Economics, Elsevier, vol. 34(S2), pages 218-227.
  • Handle: RePEc:eee:eneeco:v:34:y:2012:i:s2:p:s218-s227
    DOI: 10.1016/j.eneco.2012.09.004
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    References listed on IDEAS

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    2. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
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    6. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
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    Citations

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    Cited by:

    1. Li, Aijun & Du, Nan & Wei, Qian, 2014. "The cross-country implications of alternative climate policies," Energy Policy, Elsevier, vol. 72(C), pages 155-163.
    2. Böhringer, Christoph & Balistreri, Edward J. & Rutherford, Thomas F., 2012. "The role of border carbon adjustment in unilateral climate policy: Overview of an Energy Modeling Forum study (EMF 29)," Energy Economics, Elsevier, vol. 34(S2), pages 97-110.
    3. Stefan Nabernegg & Birgit Bednar-Friedl & Pablo Munoz & Michaela Tietz & Johanna Vogel, 2018. "National policies for global emission reductions: Effectiveness of carbon emission reductions in international supply chains," Graz Economics Papers 2018-10, University of Graz, Department of Economics.
    4. Christoph Böhringer & André Müller & Jan Schneider, 2015. "Carbon Tariffs Revisited," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(4), pages 629-672.
    5. repec:gam:jeners:v:11:y:2018:i:3:p:559-:d:134815 is not listed on IDEAS
    6. repec:sss:wpaper:201402 is not listed on IDEAS
    7. Paroussos, Leonidas & Fragkos, Panagiotis & Capros, Pantelis & Fragkiadakis, Kostas, 2015. "Assessment of carbon leakage through the industry channel: The EU perspective," Technological Forecasting and Social Change, Elsevier, vol. 90(PA), pages 204-219.

    More about this item

    Keywords

    Climate policy; Carbon leakage; Tax interactions; Border adjustments;

    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade

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