Vertical Fiscal Externalities and the Environment

47 Pages Posted: 5 Nov 2014 Last revised: 6 Nov 2014

See all articles by Christoph Böhringer

Christoph Böhringer

University of Oldenburg - Economic Policy; Centre for European Economic Research (ZEW)

Nicholas Rivers

University of Ottawa - Graduate School of Public and International Affairs

Hidemichi Yonezawa

Statistics Norway

Multiple version iconThere are 4 versions of this paper

Date Written: November 4, 2014

Abstract

We show that the imposition of a state-level environmental tax in a federation crowds outs pre-existing federal taxes. We explain how this vertical fiscal externality can lead unilateral state-level environmental policy to generate a welfare gain in the implementing state, at the expense of other states. Using a computable general equilibrium model of the Canadian federation, we show that vertical fiscal externalities can be the major determinant of the welfare change following environmental policy implementation by a state government. Our numerical simulations indicate that -- as a consequence of vertical fiscal externalities -- state governments can reduce greenhouse gas emissions by over 20 percent without any net cost to themselves.

Keywords: fiscal externality, climate policy, federalism, computable general equilibrium

JEL Classification: C68, H7, Q40

Suggested Citation

Bohringer, Christoph and Rivers, Nicholas and Yonezawa, Hidemichi, Vertical Fiscal Externalities and the Environment (November 4, 2014). Available at SSRN: https://ssrn.com/abstract=2519170 or http://dx.doi.org/10.2139/ssrn.2519170

Christoph Bohringer

University of Oldenburg - Economic Policy ( email )

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany
+49 6211235200 (Phone)
+49 6211235226 (Fax)

Nicholas Rivers (Contact Author)

University of Ottawa - Graduate School of Public and International Affairs ( email )

75 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

Hidemichi Yonezawa

Statistics Norway ( email )

N-0033 Oslo
Norway

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