Tax Distortions and Global Climate Policy

Mustafa H. Babiker, Gilbert E. Metcalf, John Reilly

NBER Working Paper No. 9136
Issued in August 2002
NBER Program(s):   ED   PE

We consider the efficiency implications of policies to reduce global carbon emissions in a world with pre-existing tax distortions. We first note 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. 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.

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Published: Babiker, Mustafa H., Gilbert E. Metcalf and John Reilly. "Tax Distortions And Global Climate Policy," Journal of Environmental Economics and Management, 2003, v46(2,Sep), 269-287.

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