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Vertical Fiscal Externalities and the Environment

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  • Christoph Böhringer
  • Nicholas Rivers
  • Hidemichi Yonezawa

Abstract

We show that imposition of a state-level environmental tax in a federation crowds out preexisting federal taxes. We explain how this vertical fiscal externality can lead unilateral state-level environmental policy to generate a welfare gain in the implementing state, at the expense of other states. Using a computable general equilibrium model of the Canadian federation, we show that vertical fiscal externalities can be the major determinant of the welfare change following environmental policy implementation by a state government. Our numerical simulations indicate that - as a consequence of vertical fiscal externalities - state governments can reduce greenhouse gas emissions by over 20 percent without any net cost to themselves.

Suggested Citation

  • Christoph Böhringer & Nicholas Rivers & Hidemichi Yonezawa, 2014. "Vertical Fiscal Externalities and the Environment," CESifo Working Paper Series 5076, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5076
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    Cited by:

    1. Zhang, Zengkai & Zhang, Zhongxiang, 2017. "Intermediate input linkage and carbon leakage," Environment and Development Economics, Cambridge University Press, vol. 22(06), pages 725-746, December.
    2. Beck, Marisa & Rivers, Nicholas & Wigle, Randall & Yonezawa, Hidemichi, 2015. "Carbon tax and revenue recycling: Impacts on households in British Columbia," Resource and Energy Economics, Elsevier, vol. 41(C), pages 40-69.
    3. repec:gam:jsusta:v:10:y:2018:i:6:p:1834-:d:150208 is not listed on IDEAS
    4. Jared C. Carbone & Nicholas Rivers & Akio Yamazaki & Hidemichi Yonezawa, 2018. "Comparing applied general equilibrium and econometric estimates of the effect of an environmental policy shock," Working Papers 2018-02, Colorado School of Mines, Division of Economics and Business.

    More about this item

    Keywords

    fiscal externality; climate policy; federalism; computable general equilibrium;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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