Tax distortions and global climate policy
Author(s)Babiker, Mustafa H.M.; Metcalf, Gilbert E.; Reilly, John M.
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We consider the efficiency implications of policies to reduce global carbon emissions in a world with pre-existing tax distortions. We first show that the weak double dividend, the proposition that the welfare improvement from a tax reform where environme ntal taxes are used to lower distorting taxes must be greater than the welfare improvement from a reform where the environmental taxes are returned in a lump sum fashion, need not hold in a world with multiple distortions. A small analytic general equilib rium model is constructed to demonstrate this result. We then present a large-scale computable general equilibrium model of the world economy with distortionary taxation. We use this model to evaluate a number of policies to reduce carbon emissions. We find that the weak double dividend is not obtained in a number of European countries. Results also demonstrate the point that the interplay between carbon policies and pre-existing taxes can differ markedly across countries. Thus one must be cautious in extrapolating the results from a country specific analysis to other countries.
Abstract in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change Website. (http://mit.edu/globalchange/www/)Includes bibliographical references (p. 17-18).
MIT Joint Program on the Science and Policy of Global Change
Report no. 85