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Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits

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  • Parry, Ian

    () (Resources for the Future)

Abstract

This paper provides simple formulas for adjusting the costs of carbon taxes and tradable carbon permits to account for interactions with preexisting tax distortions in the labor market. Both policies reduce labor supply as they increase product prices and reduce real household wages; the resulting efficiency losses in the labor market can be substantial relative to partial equilibrium abatement costs. However, much of this added cost can be offset—and perhaps more than offset when additional distortions from the tax system are considered—if revenues from carbon taxes or auctioned permits are used to reduce distortionary taxes. Consequently, there can be a strong case on efficiency grounds for using carbon taxes or auctioned permits over grandfathered carbon permits.

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  • Parry, Ian, 2003. "Fiscal Interactions and the Case for Carbon Taxes over Grandfathered Carbon Permits," Discussion Papers dp-03-46, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-03-46
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    Cited by:

    1. Katri Kosonen & Gaetan Nicodeme, 2009. "The role of fiscal instruments in environmental policy," Taxation Papers 19, Directorate General Taxation and Customs Union, European Commission.
    2. Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
    3. Joseph E. Aldy & William A. Pizer, 2009. "Issues in Designing U.S. Climate Change Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 179-210.
    4. Sadegheih, A., 2010. "A novel formulation of carbon emissions costs for optimal design configuration of system transmission planning," Renewable Energy, Elsevier, vol. 35(5), pages 1091-1097.
    5. Saveyn, Bert & Van Regemorter, Denise & Ciscar, Juan Carlos, 2011. "Economic analysis of the climate pledges of the Copenhagen Accord for the EU and other major countries," Energy Economics, Elsevier, vol. 33(S1), pages 34-40.
    6. Fraser, Iain & Waschik, Robert, 2013. "The Double Dividend hypothesis in a CGE model: Specific factors and the carbon base," Energy Economics, Elsevier, vol. 39(C), pages 283-295.
    7. Santos, Georgina & Behrendt, Hannah & Maconi, Laura & Shirvani, Tara & Teytelboym, Alexander, 2010. "Part I: Externalities and economic policies in road transport," Research in Transportation Economics, Elsevier, vol. 28(1), pages 2-45.
    8. Sartzetakis, Eftichios S. & Tsigaris, Panagiotis D., 2009. "Uncertainty and the double dividend hypothesis," Environment and Development Economics, Cambridge University Press, vol. 14(05), pages 565-585, October.
    9. Goulder, Lawrence H. & Hafstead, Marc A.C. & Dworsky, Michael, 2010. "Impacts of alternative emissions allowance allocation methods under a federal cap-and-trade program," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 161-181, November.
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    12. Lawrence H. Goulder & Marc A. C. Hafstead & Michael S. Dworsky, 2009. "Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program," NBER Working Papers 15293, National Bureau of Economic Research, Inc.
    13. Fritz Rahmeyer, 2007. "Europäischer Handel mit Treibhausgasemissionszertifikaten und seine Umsetzung in das deutsche Umweltrecht," Discussion Paper Series 296, Universitaet Augsburg, Institute for Economics.
    14. Landis,Florian & Timilsina,Govinda R., 2015. "The economics of policy instruments to stimulate wind power in Brazil," Policy Research Working Paper Series 7346, The World Bank.
    15. Fan, Lin & Hobbs, Benjamin F. & Norman, Catherine S., 2010. "Risk aversion and CO2 regulatory uncertainty in power generation investment: Policy and modeling implications," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 193-208, November.
    16. Pezzey, John C.V., 2006. "Neither the rock nor the hard place: using payment thresholds to balance the politics and the economics of emissions control," 2006 Conference (50th), February 8-10, 2006, Sydney, Australia 139892, Australian Agricultural and Resource Economics Society.
    17. FitzGerald, John & Keeney, Mary J. & McCarthy, Niamh & O'Malley, Eoin & Scott, Susan, 2005. "Aspects of Irish Energy Policy," Research Series, Economic and Social Research Institute (ESRI), number PRS57.
    18. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
    19. Alfred Endres & Cornelia Ohl, 2005. "Kyoto, Europe?—An Economic Evaluation of the European Emission Trading Directive," European Journal of Law and Economics, Springer, vol. 19(1), pages 17-39, January.

    More about this item

    Keywords

    carbon taxes; carbon permits; fiscal interactions; revenue recycling;

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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