Technology Beats Capital - Sharing the Carbon Price Burden in Federal Europe
44 Pages Posted: 6 Mar 2020
Date Written: February 6, 2020
Passing federal environmental policy reform is a challenge as the approval of interest groups such as consumers and state-level governments is often a prerequisite. Among others, the burden sharing's progressivity has a large impact on reform approval. We investigate how carbon tax payments by states to a federal authority are influenced by differences in technological emission intensity and wealth and show how they can turn out to be at the expense of poor states. We show that a uniform federal carbon tax that is endorsed by all states with equal per capita transfers can theoretically put a higher burden on poorer states than richer states. The opposite applies for transfers based on historical emissions (sovereignty transfers) which reduce the burden of emission-intensive states. We test our results numerically in a general equilibrium model with a vertical federalism governance structure calibrated to the European Union. Our simulations show that a federal minimum emissions tax with sovereignty transfers is twice as high as for equal per capita transfers and also has a progressive effect.
Keywords: Emission Regulation, Federalism, Unanimity, Transfers, Pareto-improving policy, European Union
JEL Classification: H77, H23, Q58, H87, H62
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