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

Resources for the Future Discussion Paper No. 12-19

31 Pages Posted: 12 Sep 2012

See all articles by Carolyn Fischer

Carolyn Fischer

Resources for the Future; Vrije Universiteit Amsterdam; University of Ottawa - Department of Economics

Alan K. Fox

U.S. International Trade Commission

Date Written: August 23, 2012

Abstract

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.

Keywords: climate policy, carbon leakage, tax interactions, border adjustments

JEL Classification: Q5, H21, Q37

Suggested Citation

Fischer, Carolyn and Fischer, Carolyn and Fox, Alan K., Climate Policy and Fiscal Constraints: Do Tax Interactions Outweigh Carbon Leakage? (August 23, 2012). Resources for the Future Discussion Paper No. 12-19, Available at SSRN: https://ssrn.com/abstract=2145574 or http://dx.doi.org/10.2139/ssrn.2145574

Carolyn Fischer (Contact Author)

Resources for the Future ( email )

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Vrije Universiteit Amsterdam ( email )

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University of Ottawa - Department of Economics ( email )

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Alan K. Fox

U.S. International Trade Commission ( email )

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

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