Moving US Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?

Ian Parry and Roberton C. Williams III

in Climate Change and Common Sense

Published in print February 2012 | ISBN: 9780199692873
Published online May 2012 | e-ISBN: 9780191738371 | DOI:
Moving US Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?

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This chapter estimates the welfare costs of the main medium‐term options for significantly reducing US energy‐related carbon dioxide (CO2) emissions, including carbon taxes and cap‐and‐trade systems applied economy‐wide and to the power sector only, and an emissions rate standard for power generation. The key theme is that welfare costs depend importantly on how policies interact with distortions in the economy created by the broader fiscal system. Economy‐wide cap‐and‐trade systems, or carbon taxes, where allowance rent or tax revenue is not used to increase economic efficiency, perform the worst on cost‐effectiveness grounds. In contrast, the costs of economy‐wide carbon taxes or auctioned allowance systems may be (slightly) negative, if revenues are used to substitute for distortionary income taxes (either directly, or indirectly through deficit reduction). The bottom line is that revenue/rents created under economy‐wide, market‐based carbon policies must be used to increase economic efficiency to ensure that these instruments are more cost‐effective than regulatory or sectoral approaches.

Keywords: carbon tax; cap‐and‐trade; cost effectiveness; distortionary taxes; revenue recycling

Chapter.  11994 words.  Illustrated.

Subjects: Economic Development and Growth

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