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Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits

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  • Parry, Ian W.H.

Abstract

This paper provides simple formulas for adjusting the costs of carbon taxes and tradable carbon permits to account for interactions with preexisting tax distortions in the labor market. Both policies reduce labor supply as they increase product prices and reduce real household wages; the resulting efficiency losses in the labor market can be substantial relative to partial equilibrium abatement costs. However, much of this added cost can be offset-and perhaps more than offset when additional distortions from the tax system are considered-if revenues from carbon taxes or auctioned permits are used to reduce distortionary taxes. Consequently, there can be a strong case on efficiency grounds for using carbon taxes or auctioned permits over grandfathered carbon permits.

Suggested Citation

  • Parry, Ian W.H., 2003. "Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits," Discussion Papers 10509, Resources for the Future.
  • Handle: RePEc:ags:rffdps:10509
    DOI: 10.22004/ag.econ.10509
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    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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