Journal Article

Fiscal Interactions and the Case for Carbon Taxes Over Grandfathered Carbon Permits

Ian W. H. Parry

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 19, issue 3, pages 385-399
Published in print September 2003 | ISSN: 0266-903X
Published online September 2003 | e-ISSN: 1460-2121 | DOI: https://dx.doi.org/10.1093/oxrep/19.3.385
Fiscal Interactions and the Case for Carbon Taxes Over Grandfathered Carbon Permits

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This paper provides simple formulas for adjusting the costs of carbon taxes and tradable carbon permits to account for interactions with pre-existing tax distortions in the labour market. Both policies reduce labour supply as they increase product prices and reduce real household wages; the resulting efficiency losses in the labour market can be substantial relative to partial equilibrium abatement costs. However, much of this added cost can be offset, and perhaps more than offset when additional distortions from the tax system are considered, if revenues from carbon taxes or auctioned permits are used to reduce distortionary taxes. Consequently, there can be a strong case on efficiency grounds for using carbon taxes or auctioned permits over grandfathered carbon permits.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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