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Carbon Taxation When Climate Affects Productivity


  • William K. Jaeger


Based on a model where climate change affects productivity, the second-best optimal carbon tax is found to exceed marginal social damage by 53% and ‘‘marginal private damage’’ (aggregate households’ willingness to pay) by 73%. Annual welfare gains are estimated at $3.58 billion when marginal damage is $40 per ton; employment also increases. A carbon tax set at the Pigouvian rate raises welfare by only $3.17 billion. The seemingly contradictory results from the ‘‘tax interaction’’ literature are shown to arise only when the optimal environmental tax is compared to ‘‘marginal private damage,’’ and only for an amenity externality.

Suggested Citation

  • William K. Jaeger, 2002. "Carbon Taxation When Climate Affects Productivity," Land Economics, University of Wisconsin Press, vol. 78(3), pages 354-367.
  • Handle: RePEc:uwp:landec:v:78:y:2002:i:3:p:354-367

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    References listed on IDEAS

    1. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November.
    2. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
    3. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-1190, September.
    4. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June.
    5. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    6. William R. Cline, 1992. "Economics of Global Warming, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 39.
    7. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 64-77, November.
    8. Ian W.H. Parry & Wallace E. Oates, 2000. "Policy analysis in the presence of distorting taxes," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(4), pages 603-613.
    9. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 1997. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 708-731, Winter.
    10. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January.
    11. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-948, July.
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    Cited by:

    1. Goodstein, Eban, 2002. "Labor supply and the double-dividend," Ecological Economics, Elsevier, vol. 42(1-2), pages 101-106, August.
    2. Iain Fraser & Robert Waschik, 2010. "The Double Dividend Hypothesis in a CGE Model: Specific Factors and Variable Labour Supply," Working Papers 2010.02, School of Economics, La Trobe University.
    3. Ekins, Paul & Pollitt, Hector & Summerton, Philip & Chewpreecha, Unnada, 2012. "Increasing carbon and material productivity through environmental tax reform," Energy Policy, Elsevier, vol. 42(C), pages 365-376.
    4. William Jaeger, 2011. "The Welfare Effects of Environmental Taxation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(1), pages 101-119, May.
    5. repec:dgr:uvatin:20020095 is not listed on IDEAS
    6. Li, Hui & Berrens, Robert P. & Bohara, Alok K. & Jenkins-Smith, Hank C. & Silva, Carol L. & Weimer, David L., 2004. "Would developing country commitments affect US households' support for a modified Kyoto Protocol?," Ecological Economics, Elsevier, vol. 48(3), pages 329-343, March.
    7. Patuelli, Roberto & Nijkamp, Peter & Pels, Eric, 2005. "Environmental tax reform and the double dividend: A meta-analytical performance assessment," Ecological Economics, Elsevier, vol. 55(4), pages 564-583, December.
    8. repec:gam:jsusta:v:9:y:2017:i:10:p:1747-:d:113547 is not listed on IDEAS

    More about this item

    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue


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