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Climate Policy and Fiscal Constraints: Do Tax Interactions Outweigh Carbon Leakage?

  • Fischer, Carolyn


    (Resources for the Future)

  • Fox, Alan K.

Climate policymaking faces twin challenges of carbon leakage and public sector revenue requirements. A large literature advocates the use of carbon dioxide (CO2) pricing and recycling the revenues to lower distorting taxes as a way to minimize costs. In this paper, we explore the implications of labor tax interactions for the cost-effectiveness of border adjustments and other measures to cope with leakage. We find that, for plausible values of labor supply elasticities, the cost savings from revenue recycling are significant—from 15 to 25 percent. The cost savings from anti-leakage measures are generally smaller, but also significant, particularly for small coalitions or more binding reduction targets. Tax interactions further enhance the cost savings from border adjustments, but make other measures like rebates or exemptions less attractive.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-12-19.

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Date of creation: 23 Aug 2012
Date of revision:
Handle: RePEc:rff:dpaper:dp-12-19
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  1. Christoph Böhringer & Carolyn Fischer & Knut Einar Rosendahl, 2011. "Cost-effective unilateral climate policy design: Size Matters," Discussion Papers 664, Statistics Norway, Research Department.
  2. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
  3. Christoph Böhringer & Andreas Lange & Thomas F. Rutherford, 2012. "Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives," Working Papers V-347-12, University of Oldenburg, Department of Economics, revised Jun 2012.
  4. Michiel Evers & Ruud de Mooij & Daniel van Vuuren, 2005. "What explains the variation in estimates of labour supply elasticities?," CPB Discussion Paper 51, CPB Netherlands Bureau for Economic Policy Analysis.
  5. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
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  7. Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
  8. A. Lans Bovenberg & Lawrence H. Goulder, 1994. "Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses," NBER Working Papers 4897, National Bureau of Economic Research, Inc.
  9. Hertel, Thomas & Hummels, David & Ivanic, Maros & Keeney, Roman, 2007. "How confident can we be of CGE-based assessments of Free Trade Agreements?," Economic Modelling, Elsevier, vol. 24(4), pages 611-635, July.
  10. Parry, Ian W.H. & Williams, Roberton C. III, 2010. "What Are the Costs of Meeting Distributional Objectives in Designing Domestic Climate Policy?," Discussion Papers dp-10-51, Resources For the Future.
  11. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  12. Sergey V. Paltsev, 2001. "The Kyoto Protocol: Regional and Sectoral Contributions to the Carbon Leakage," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 53-80.
  13. Hoel, Michael, 1994. "Should a Carbon Tax be Differentiated Across Sectors?," CEPR Discussion Papers 1066, C.E.P.R. Discussion Papers.
  14. Parry Ian W. H. & Williams Roberton C., 2010. "What are the Costs of Meeting Distributional Objectives for Climate Policy?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-35, December.
  15. repec:cbo:report:418806 is not listed on IDEAS
  16. Bernard, Alain L. & Fischer, Carolyn & Fox, Alan K., 2007. "Is there a rationale for output-based rebating of environmental levies?," Resource and Energy Economics, Elsevier, vol. 29(2), pages 83-101, May.
  17. Hidemichi Yonezawa & Edward J. Balistreri & Daniel T. Kaffine, 2012. "The suboptimal nature of applying Pigouvian rates as border adjustments," Working Papers 2012-02, Colorado School of Mines, Division of Economics and Business.
  18. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
  19. repec:cbo:report:418804 is not listed on IDEAS
  20. repec:cbo:report:418807 is not listed on IDEAS
  21. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
  22. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
  23. repec:cbo:report:41880 is not listed on IDEAS
  24. Böhringer, Christoph & Carbone, Jared C. & Rutherford, Thomas F., 2012. "Unilateral climate policy design: Efficiency and equity implications of alternative instruments to reduce carbon leakage," Energy Economics, Elsevier, vol. 34(S2), pages S208-S217.
  25. Congressional Budget Office, 2010. "The Budget and Economic Outlook: Fiscal Years 2010 to 2020," Reports 41880, Congressional Budget Office.
  26. repec:zbw:hohpro:346 is not listed on IDEAS
  27. Fischer, Carolyn & Fox, Alan K., 2009. "Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions," Discussion Papers dp-09-12, Resources For the Future.
  28. Mustafa H. Babiker & Thomas F. Rutherford, 2005. "The Economic Effects of Border Measures in Subglobal Climate Agreements," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 99-126.
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