Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analyses

Abstract

This paper examines the optimal setting of environmental taxes in economies where other, distortionary taxes are present We employ analytical and numerical models to explore the degree to which, in a second best economy, optimal environmental tax rates differ from the rates implied by the Pigovian principle (according to which the optimal tax rate equals the marginal environmental damages). Both models indicate, contrary to what several analysts have suggested, that the optimal tax rate on emissions of a given pollutant is generally less than the rate supported by the Pigovian principle. Moreover, the optimal rate is lower the larger are the distortions posed by ordinary taxes. Numerical results indicate that previous studies may have seriously overstated the size of the optimal carbon tax by disregarding .pre-existing taxes.

Double Dividend of Climate Protection and the Role of International Policy Coordination in the EU — An Applied General Equilibrium Analysis with the GEM-E3 Model

“…Hence, one could argue that a tax reform could enable efficiency gains which are not linked solely to a new environmental tax but to a general change in (effective) factor tax rates. 21 But this is still not in line with the findings of Bovenberg/Goulder (1996), who show that both, the analytical and the empirical analysis coincidence even if one considers pre-existing taxes: While they find analytically that the prospects of a double dividend are enhanced if "... a revenue neutral tax reform shifts the burden of taxation to the less efficient (undertaxed) factor...", there is no empirical evidence obtaining such a situation: no double dividend is obtained in their numerical analysis for a wide range of parameters.…”

“…Alternative specification and differences in the underlying data are the major reason why the findings of empirical work are less unique than those of the analytical work. While the models of Goulder (1995a) and Bovenberg/Goulder (1996) trace no double dividend for the US economy, the models of Jorgenson/Wilcoxen (1994) and Ballard/Medema (1993) confirm the double dividend hypothesis for the same economy.…”

“…Hence, the marginal excess burden of the overall tax system decreases sharply if the assumption of full capital mobility is removed. As Bovenberg/Goulder (1996) concede, a highly suboptimal pre-exisiting tax system (i.e. a tax system where the meb of different taxes vary quite a lot) enhaces the chance of obtaining a double dividend, if the burden of the new environmental tax falls mainly on the undertaxed factor (which is capital in our case) and relieves the burden of the overtaxed factor (labour).…”

Ecological Tax Reform with Exemptions for the Export Sector in a Two Sector Two Factor Model

“…Besides that a large number of models exist that analyze environmental tax reform in a computable general equilibrium (see, for example, Ballard andMedema (1993), Goulder (1995a), Boyd, Krutilla and Viscusi (1995), Bovenberg and Goulder (1996) or Parry, Williams and Goulder (1999)). These models all incorporate many sectors and several factors, but they do not, with the exception of Böhringer and Rutherford (1997) 7 , address the topic of discriminating factor taxes within an environmental tax reform.…”

Taxing Carbon Under Market Incompleteness

“…Obviously, without a model where heterogeneity across agents is not spelled out this exercise would simply be impossible. By means of our model we are able to assess the level of regressivity of emission taxes and to test the double dividend hypothesis discussed in Bovenberg and Goulder (1996) and Bovenberg and van der Ploeg (1994).…”