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
Date Written: August 23, 2012
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: Suggested Citation