Targeted Carbon Tax Reforms
36 Pages Posted: 12 Feb 2018 Last revised: 26 Oct 2018
Date Written: August 27, 2018
We show that while an economy-wide carbon tax reform must lead to a fall in aggregate emissions, a policy that targets only some sectors can bring about an even greater emissions reduction. This is because taxing emissions of certain sectors can in principle contribute to an increase in aggregate emissions via a tax rebate effect. We show that, in the presence of intersectoral linkages, the most effective carbon tax reform targets sectors based not on their direct emissions but on their aggregate emissions impacts i.e. the change in aggregate emissions that results from individually taxing each sector. We analytically characterise these impacts in an intersectoral network model and empirically illustrate effective carbon tax reforms in two economies.
Keywords: emissions tax, carbon tax, pollution tax, climate change, environmental tax reform, second-best policy, input-output linkages, intersectoral network, cap-and-trade.
JEL Classification: D51, D62, H23, Q54
Suggested Citation: Suggested Citation