Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide

Resources for the Future DP 13-31

26 Pages Posted: 11 Oct 2013

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Marc A. C. Hafstead

Stanford University

Date Written: October 8, 2013

Abstract

Carbon taxes are a potential revenue source that could play a key role in major tax reform. This paper employs a numerical general equilibrium model of the United States to evaluate alternative tax reductions that could be financed by the revenues from a carbon tax. We consider a carbon tax that begins at $10 per ton in 2013 and increases at 5 percent per year to the year 2040. The net revenue from the tax is substantial, and the GDP and welfare impacts of the tax depend significantly on how this revenue is recycled to the private sector. Under our central case simulations (which do not account for beneficial environmental impacts) over the period 2013–2040, the tax reduces GDP by .56 percent when revenues are returned through lump-sum rebates to households, as compared with .33 and .24 percent when the revenues are recycled through reductions in personal and corporate tax rates, respectively. Introducing tradable exemptions to the carbon tax reduces or eliminates the negative impacts on the profits of the most vulnerable carbon-supplying or carbon-using industries. The GDP and welfare impacts are somewhat larger when such exemptions are introduced.

Keywords: carbon tax, tax reform, climate

JEL Classification: Q50, Q58, H23

Suggested Citation

Goulder, Lawrence H. and Hafstead, Marc A. C., Tax Reform and Environmental Policy: Options for Recycling Revenue from a Tax on Carbon Dioxide (October 8, 2013). Resources for the Future DP 13-31, Available at SSRN: https://ssrn.com/abstract=2338210 or http://dx.doi.org/10.2139/ssrn.2338210

Lawrence H. Goulder

Stanford University - Department of Economics ( email )

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Resources for the Future

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Marc A. C. Hafstead (Contact Author)

Stanford University ( email )

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