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On the Choice of Tax Base to Reduce Greenhouse Gas Emissions in the Context of Electricity Generation

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  • Fraser, Rob W.

Abstract

This paper analyses the role of uncertain demand in determining the government’s choice between an ad valorem and a specific base for its tax to reduce greenhouse gas emissions in the electricity generating sector. Using a model of optimal capacity choice for a pricetaking firm facing demand uncertainty it is shown that an ad valorem tax is more effective in reducing emissions than its equivalent specific tax, although this benefit comes at the cost of lower reliability of electricity supply. A numerical analysis provides a robust finding that the ad valorem tax is expected to generate greater tax revenue, thereby providing support for the choice of this tax base in situations where the extra tax revenue can be used to compensate consumers for reduced reliability of supply.

Suggested Citation

  • Fraser, Rob W., 2006. "On the Choice of Tax Base to Reduce Greenhouse Gas Emissions in the Context of Electricity Generation," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139729, Australian Agricultural and Resource Economics Society.
    • Handle: RePEc:ags:aare06:139729
    DOI: 10.22004/ag.econ.139729
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    References listed on IDEAS

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    1. Fraser, Rob, 1994. "Price, quality and regulation : An analysis of price capping and the reliability of electricity supply," Energy Economics, Elsevier, vol. 16(3), pages 175-183, July.
    2. Fischer, Carolyn & Parry, Ian W. H. & Pizer, William A., 2003. "Instrument choice for environmental protection when technological innovation is endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 523-545, May.
    3. Burtraw, Dallas & Krupnick, Alan & Palmer, Karen & Paul, Anthony & Toman, Michael & Bloyd, Cary, 2003. "Ancillary benefits of reduced air pollution in the US from moderate greenhouse gas mitigation policies in the electricity sector," Journal of Environmental Economics and Management, Elsevier, vol. 45(3), pages 650-673, May.
    4. Fraser, R. W., 1985. "Commodity taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 28(1), pages 127-134, October.
    5. Goulder, Lawrence H. & Mathai, Koshy, 2000. "Optimal CO2 Abatement in the Presence of Induced Technological Change," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 1-38, January.
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