Tax Policy to Combat Global Warming: On Designing a Carbon Tax

42 Pages Posted: 14 Nov 2007 Last revised: 2 Dec 2013

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: March 1991

Abstract

This paper develops several points concerning the design and implementation of a carbon tax. First, if implemented without any offsetting changes in transfer programs, the carbon tax would be regressive. This regressivity could be offset with changes in either the direct tax system or transfers. Second, the production and consumption distortions associated with small carbon taxes, on the order of $5/ton of carbon, are relatively small: less than $1 billion per year for the United States. Stabilizing carbon dioxide emissions at their 1988 levels by the year 2000, however, would require a carbon tax ten to twenty times this size. It would more than triple the producer price of coal and nearly double the producer prices of petroleum and natural gas, would have much more significant private efficiency effects. Third, a central issue of carbon tax design is harmonization with other fiscal instruments designed to reduce greenhouse warming. Ensuring comparability between taxes rates on chlorofluorocarbons and fossil fuels is particularly important to avoid unnecessary distortions in production or consumption decisions.

Suggested Citation

Poterba, James M., Tax Policy to Combat Global Warming: On Designing a Carbon Tax (March 1991). NBER Working Paper No. w3649. Available at SSRN: https://ssrn.com/abstract=480207

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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