Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions

23 Pages Posted: 23 May 2009

See all articles by Carolyn Fischer

Carolyn Fischer

Resources for the Future

Alan K. Fox

U.S. International Trade Commission

Date Written: May 19, 2009

Abstract

Emissions regulations like carbon pricing raise the price of covered sector goods and thus can interact with and exacerbate other preexisting distortions in the economy. One such distortion is labor taxes. Another is emissions "leakage" due to the lack of comparable emissions pricing abroad or among other emitting sectors at home. A potential response is to combine the emissions tax with a rebate to production to mitigate the price increases. We use an optimal tax framework to solve for the optimal emissions tax and output rebate, given these distortions. We then employ a multisector computable general equilibrium model based on the GTAP framework to simulate the effects of a $50 per-ton carbon tax on the major emissions-intensive sectors in the U.S. economy and estimate optimal rebates by sector.

Keywords: carbon tax, tax interaction, carbon leakage

JEL Classification: Q2, Q43, H2, D58, D61

Suggested Citation

Fischer, Carolyn and Fox, Alan K., Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions (May 19, 2009). RFF Discussion Paper No. 09-12. Available at SSRN: https://ssrn.com/abstract=1408692 or http://dx.doi.org/10.2139/ssrn.1408692

Carolyn Fischer (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States
202-328-5012 (Phone)
202-939-3460 (Fax)

HOME PAGE: http://www.rff.org/~fischer

Alan K. Fox

U.S. International Trade Commission ( email )

500 E St SW
Washington, DC 20436
United States
202-205-3267 (Phone)
202-205-2340 (Fax)

HOME PAGE: http://www.usitc.gov

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