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Environmental policy competition and differential tax treatment; a case for tighter coordination?

Author

Listed:
  • Richard Nahuis

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Paul Tang

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

The Kyoto Protocol binds the level of greenhouse gas emissions in participating countries. It does not, however, dictate how the countries are to achieve this level. The economic costs of reaching emission targets are generally evaluated to be low. For example, evaluations with applied general-equilibrium models estimate the costs to be in the range of 0.2% to 0.5% of GDP, when international trade in emissions rights among governments is allowed for. We argue that important costs are overlooked since governments have an incentive to choose highly distorting tax schemes. This paper shows that governments generally choose different energy tax rates for households and for internationally operating firms as the result of tax competition or pollution competition: in the first case, governments try to undercut other governments to attract firms to their country, whereas in the second, they try to push dirty industries across the border. In both cases, the incentive for firms and households to use or save energy is different at the margin. Both cases call for coordination of climate change policies that goes beyond a binding ceiling on greenhouse gas emissions and international trade in permit rights among governments alone.

Suggested Citation

  • Richard Nahuis & Paul Tang, 2005. "Environmental policy competition and differential tax treatment; a case for tighter coordination?," CPB Discussion Paper 50, CPB Netherlands Bureau for Economic Policy Analysis.
  • Handle: RePEc:cpb:discus:50
    as

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    References listed on IDEAS

    as
    1. Rietveld, Piet & van Woudenberg, Stefan, 2005. "Why fuel prices differ," Energy Economics, Elsevier, vol. 27(1), pages 79-92, January.
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    4. Pfluger, Michael, 2001. " Ecological Dumping under Monopolistic Competition," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(4), pages 689-706, December.
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    9. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
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    11. David M Newbery, 1992. "Should Carbon Taxes Be Additional to Other Transport Fuel Taxes?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 49-60.
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    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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