Vertical Fiscal Externalities and the Environment

51 Pages Posted: 21 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

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Date Written: November 20, 2014

Abstract

We show that imposition of a state-level environmental tax in a federation crowds out preexisting federal taxes. We explain how this vertical fiscal externality can lead unilateral statelevel 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

Suggested Citation

Bohringer, Christoph and Rivers, Nicholas and Yonezawa, Hidemichi, Vertical Fiscal Externalities and the Environment (November 20, 2014). ZenTra Working Paper in Transnational Studies No. 43 / 2014, Available at SSRN: https://ssrn.com/abstract=2528489 or http://dx.doi.org/10.2139/ssrn.2528489

Christoph Bohringer (Contact Author)

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

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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