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Tax Policy to Combat Global Warming: On Designing a Carbon Tax

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  • James M. Poterba

Abstract

This paper develops several points concerning the design and implementation of a carbon tax. First, if implemented without any offsetting changes in transfer programs, the carbon tax would be regressive. This regressivity could be offset with changes in either the direct tax system or transfers. Second, the production and consumption distortions associated with small carbon taxes, on the order of $5/ton of carbon, are relatively small: less than $1 billion per year for the United States. Stabilizing carbon dioxide emissions at their 1988 levels by the year 2000, however, would require a carbon tax ten to twenty times this size. It would more than triple the producer price of coal and nearly double the producer prices of petroleum and natural gas, would have much more significant private efficiency effects. Third, a central issue of carbon tax design is harmonization with other fiscal instruments designed to reduce greenhouse warming. Ensuring comparability between taxes rates on chlorofluorocarbons and fossil fuels is particularly important to avoid unnecessary distortions in production or consumption decisions.

Suggested Citation

  • James M. Poterba, 1991. "Tax Policy to Combat Global Warming: On Designing a Carbon Tax," NBER Working Papers 3649, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3649
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    1. Poterba, James M, 1989. "Lifetime Incidence and the Distributional Burden of Excise Taxes," American Economic Review, American Economic Association, vol. 79(2), pages 325-330, May.
    2. James M. Poterba, 1991. "Is the Gasoline Tax Regressive?," NBER Chapters,in: Tax Policy and the Economy, Volume 5, pages 145-164 National Bureau of Economic Research, Inc.
    3. Poterba, James M & Rotemberg, Julio J & Summers, Lawrence H, 1986. "A Tax-Based Test for Nominal Rigidities," American Economic Review, American Economic Association, vol. 76(4), pages 659-675, September.
    4. Lester B. Lave, 1987. "The greenhouse effect: What government actions are needed?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 7(3), pages 460-470.
    5. N/A, 1985. "General Policy," India Quarterly: A Journal of International Affairs, , vol. 41(1), pages 74-79, January.
    6. Ballard, Charles L. & Fullerton, Don & Shoven, John B. & Whalley, John, 2009. "A General Equilibrium Model for Tax Policy Evaluation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226036335, June.
    7. N/A, 1985. "General Policy," India Quarterly: A Journal of International Affairs, , vol. 41(1), pages 112-117, January.
    8. Davies, James B & St-Hilaire, France & Whalley, John, 1984. "Some Calculations of Lifetime Tax Incidence," American Economic Review, American Economic Association, vol. 74(4), pages 633-649, September.
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