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Vertical fiscal externalities and the environment

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  • Christoph Böhringer

    () (University of Oldenburg)

  • Nicholas Rivers

    () (University of Ottawa)

  • Hidemichi Yonezawa

    () (ETH Zurich, Switzerland)

Abstract

We show that imposition of a state-level environmental tax in a federation crowds out pre-existing 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, even absent any environmental benefits. 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, 2016. "Vertical fiscal externalities and the environment," CER-ETH Economics working paper series 16/234, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  • Handle: RePEc:eth:wpswif:16-234
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    References listed on IDEAS

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    Citations

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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(6), pages 725-746, December.
    2. Jared C. Carbone & Nicholas Rivers & Akio Yamazaki & Hidemichi Yonezawa, 2020. "Comparing Applied General Equilibrium and Econometric Estimates of the Effect of an Environmental Policy Shock," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(4), pages 687-719.
    3. 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.
    4. Taran Fæhn & Gabriel Bachner & Robert Beach & Jean Chateau & Shinichiro Fujimori & Madanmohan Ghosh & Meriem Hamdi-Cherif & Elisa Lanzi & Sergey Paltsev & Toon Vandyck & Bruno Cunha & Rafael Garaffa &, 2020. "Capturing Key Energy and Emission Trends in CGE models. Assessment of Status and Remaining Challenges," Discussion Papers 936, Statistics Norway, Research Department.
    5. Taran Faehn & Gabriel Bachner & Robert Beach & Jean Chateau & Shinichiro Fujimori & Madanmohan Ghosh & Meriem Hamdi-Cherif & Elisa Lanzi & Sergey Paltsev & Toon Vandyck & Bruno Cunha & Rafael Garaffa , 2020. "Capturing Key Energy and Emission Trends in CGE models: Assessment of Status and Remaining Challenges," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 5(1), pages 196-272, June.
    6. Waldemar Marz, 2019. "Komplexitätsdimensionen von Klimapolitik: Die Rolle von politischer Ökonomie, Kapitalmärkten und der Stadtform," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 85.
    7. Zenglian Zhang & Wenju Zhao, 2018. "Research on Financial Pressure, Poverty Governance, and Environmental Pollution in China," Sustainability, MDPI, Open Access Journal, vol. 10(6), pages 1-24, June.

    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
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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