In this paper we consider the economic and environmental impacts of taxes on emissions of greenhouse gases. Substituting carbon taxes for other sources of revenue or using the proceeds to reduce deficits or finance expenditures are the keys to integration of carbon taxes with fiscal reform. Recycling carbon tax revenues through reductions of capital income tax rates provides the largest margin of economic benefits over the costs of emissions control. Reducing capital tax rates lowers the cost of capital services and increases the rate of capital formation. This mechanism provides a dramatic illustration of the power of intertemporal general equilibrium modeling in the design of new energy and environmental policies for the United States.

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A rigorous and innovative approach for integrating environmental policies and fiscal reform for the U.S. economy. Energy utilization, especially from fossil fuels, creates hidden costs in the form of pollution and environmental damages. The costs are well documented but are hidden in the sense that they occur outside the market, are not reflected in market prices, and are not taken into account by energy users. Double Dividend presents a novel method for designing environmental taxes that correct market prices so that they reflect the true cost of energy. The resulting revenue can be used in reducing the burden of the overall tax system and improving the performance of the economy, creating the double dividend of the title. The authors simulate the impact of environmental taxes on the U.S. economy using their Intertemporal General Equilibrium Model (IGEM). This highly innovative model incorporates expectations about future prices and policies. The model is estimated econometrically from an extensive 50-year dataset to incorporate the heterogeneity of producers and consumers. This approach generates confidence intervals for the outcomes of changes in economic policies, a new feature for models used in analyzing energy and environmental policies. These outcomes include the welfare impacts on individual households, distinguished by demographic characteristics, and for society as a whole, decomposed between efficiency and equity.

Clim. Change Econ. 2018.09. Downloaded from www.worldscientific.com by 54.191.190.102 on 05/11/18. For personal use only.This paper presents a multi-model assessment of the distributional impacts of carbon pricing. A set of harmonized representative CO 2 taxes and tax revenue recycling schemes is implemented in five large-scale economy-wide general equilibrium models. Recycling schemes include various combinations of uniform transfers to households and labor and capital income tax reductions. Particular focus is put on equity -the distribution of impacts across household incomes -and efficiency, evaluated in terms of household welfare. Despite important differences in the assumptions underlying the models, we find general agreement regarding the ranking of recycling schemes in terms of both efficiency and equity. All models identify a clear trade-off between efficient but regressive capital tax reductions and progressive but costly uniform transfers to households; all agree upon the inferiority of labor tax reductions in terms of welfare efficiency; and all agree that different combinations of capital tax reductions and household transfers can be used to balance efficiency and distributional concerns. A subset of the models go further and find that equity concerns, particularly regarding the impact of the tax on low income households, can be alleviated without sacrificing much of the double-dividend benefits offered by capital tax rebates. There is, however, less agreement regarding the progressivity of CO 2 taxation net of revenue recycling. Regionally, the models agree that abatement and welfare impacts will vary considerably across regions of the U.S. and generally agree on their broad geographical distribution. There is, however, little agreement regarding the regions which would profit more from the various recycling schemes.

For EMF 32, we applied a new version of our Intertemporal General Equilibrium Model (IGEM) based on the North American Industry Classification System (NAICS). We simulated the impacts arising from the Energy Modeling Forum’s broad range of carbon taxes under three revenue recycling options — lump sum redistributions, capital tax reductions, and labor tax cuts. We examined their consequences for industry prices and quantities, for the overall economy, and for the welfare of households, individuals, and society, the latter in terms of efficiency and equity. We rank recycling mechanisms from most to least favorable in terms of the magnitudes of their impacts on net social welfare — efficiency net of equity — recognizing that other objectives may be more important to policy makers and the public. Finally, we and the EMF 32 effort focus only on the economic effects of carbon taxation and revenue recycling; the environmental benefits arising from emissions reductions are not within our scope of study. We find CO2 emissions abatement to be invariant to the chosen recycling scheme. This means that policy makers need not compromise their environmental objectives when designing carbon tax swap options. We also find additional emissions reductions beyond the scope of coverage and points of taxation. Reducing capital taxes promotes new saving, investment and capital formation and is the most favorable recycling mechanism. In 2010 dollars, the welfare loss per ton abated ranges from $0.19 to $3.90 depending on the path of carbon prices. Reducing labor taxes promotes consumption and work through real-wage incentives and is the next most favorable recycling scheme. Here, the welfare loss per ton abated ranges from $11.09 to $16.49 depending on the carbon tax trajectory. Lump sum redistribution of carbon tax revenues is the least favorable recycling option. It incentivizes neither capital nor labor. Consequently, the damages to the economy and welfare are the greatest among the three schemes. With lump sum recycling, the welfare loss per ton abated ranges from $37.15 to $43.61 as carbon taxation becomes more aggressive. While this ranking is common among the participating EMF 32 models, the spread in our results is the greatest in comparison which we attribute to the substitution possibilities inherent in IGEM’s econometrics, the absence of barriers to factor mobility, and likely differences in the manner in which tax incentives are structured. We find welfare gains are possible under capital and labor tax recycling when emissions accounting is viewed from a top-down rather than a bottom-up perspective and carbon pricing is at an economy-wide average. However, these gains occur at the expense of abatement. We find capital tax recycling to be regressive while labor tax recycling is progressive as is redistribution through lump sums. Moreover, we find that the lump sum mechanism provides the best means for sheltering the poorest from the welfare consequences of carbon taxation. Thus, promoting capital formation is the best use of carbon tax revenues in terms of reducing the magnitudes of welfare losses while the lump sum and labor tax options are the best uses for reducing inequality.