Reports

Report 85

Tax Distortions and Global Climate Policy

by Babiker, M.H., G.E. Metcalf and J. Reilly (May 2002)
Joint Program Report Series, 22 pages, 2002

(Superseded by Reprint 2003-4) (J. of Environmental Economics and Management, 46: 269-287)

Abstract

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 environmental 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 equilibrium 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.

Link to full document (1080 kB PDF)