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Green Taxes and Administrative Costs: The Case of Carbon Taxation

  • Sjak Smulders
  • Herman R.J. Vollebergh

This paper explores the trade-off between incentive effects and administrative costs associated with the implementation of various environmental tax instruments, with special reference to carbon taxes. In a simple model, we show under what conditions it is optimal to use input rather than emission taxes to internalize environmental externalities. Mixed tax regimes are also studied. If linkage of emissions to inputs is close, if abatement possibilities are costly, and if administrative costs of emission taxes are high, emission taxes should not be introduced. It is shown that these conditions directly apply to current tax policies toward CO2 emissions in several European countries that harness pre-existing energy taxes. First, there is a one-to-one correspondence between carbon content of energy and CO2 emissions. Second, only few possibilities exist to abate CO2 emissions separately. Third, energy excises allow to save on administrative costs. Broadening the carbon tax base by removing certain widely-used exemptions for energy production (and possibly adding emission taxes or abatement subsidies for selected industries) is likely to increase incentives for carbon reduction without significant additional administrative costs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7298.

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Date of creation: Aug 1999
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Publication status: published as Green Taxes and Administrative Costs: The Case of Carbon Taxation , Sjak Smulders, Herman R. J. Vollebergh. in Behavioral and Distributional Effects of Environmental Policy , Carraro and Metcalf. 2001
Handle: RePEc:nbr:nberwo:7298
Note: PE
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  1. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
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  10. Don Fullerton & Inkee Hong & Gilbert E. Metcalf, 1999. "A Tax on Output of the Polluting Industry is Not a Tax on Pollution: The Importance of Hitting the Target," Discussion Papers Series, Department of Economics, Tufts University 9908, Department of Economics, Tufts University.
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  13. Thomas A. Barthold, 1994. "Issues in the Design of Environmental Excise Taxes," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 133-151, Winter.
  14. 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.
  15. Pearce, David W, 1991. "The Role of Carbon Taxes in Adjusting to Global Warming," Economic Journal, Royal Economic Society, vol. 101(407), pages 938-48, July.
  16. Stephen Smith, 1992. "Taxation and the environment: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 13(4), pages 21-57, January.
  17. Smith, S & McKay, Stephen & Pearson, M, 1990. "Fiscal instruments in environmental policy," Fiscal Studies, Institute for Fiscal Studies, vol. 11(4), pages 1-20, November.
  18. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
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