Using the Tax System to Address Competition Issues with a Carbon Tax

Resources for the Future DP 13-30

43 Pages Posted: 11 Oct 2013

See all articles by Gilbert E. Metcalf

Gilbert E. Metcalf

Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 8, 2013

Abstract

This paper considers how tax reductions financed by a carbon tax could be designed to mitigate the need for specific relief for firms in select energy-intensive, trade-exposed (EITE) sectors. In particular, I consider impacts on manufacturing sectors at the six-digit North American Industry Classification System level, with a special focus on firms that would be presumptively eligible for competitiveness relief using the criteria in the Waxman-Markey bill (H.R. 2454). The paper has a number of findings. First, determination of eligibility for relief analogous to the free allowance allocation in H.R. 2454 is sensitive to energy intensity. Second, providing compensation to EITE sectors through the corporate income tax — analogous to the output-based allowance allocation in Waxman-Markey — is certainly feasible, but tax appetite within the EITE sectors is insufficient to fully use any credits that attempted to offset more than about one-quarter of their carbon tax liability. Third, certain reforms do better than others at providing disproportionate relief to EITE sectors. Finally, economic theory predicts a substantial cost to diverting carbon tax revenue toward compensation of specific sectors. Theory also suggests that firms should treat policy risk no differently from the way they treat the other risks they face as they do business. But politics may dictate otherwise; if so, the analysis here suggests that certain approaches may work better than others to ensure that relief is appropriately targeted at minimal cost.

Keywords: carbon taxes, taxation, tax code, energy-intensive trade-exposed industries

JEL Classification: H23, H25, Q54, Q58

Suggested Citation

Metcalf, Gilbert E., Using the Tax System to Address Competition Issues with a Carbon Tax (October 8, 2013). Resources for the Future DP 13-30. Available at SSRN: https://ssrn.com/abstract=2338182 or http://dx.doi.org/10.2139/ssrn.2338182

Gilbert E. Metcalf (Contact Author)

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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