A Tax Mix Change to Reduce Greenhouse Gas Emissions

John Freebairn

No 100551, 2011 Conference (55th), February 8-11, 2011, Melbourne, Australia from Australian Agricultural and Resource Economics Society

Abstract: Placing a price on greenhouse gas emissions using an emissions tax or auctioning tradable permits provide the least cost government intervention to reduce pollution. Initial effects of the charge on pollution include an increase in the relative prices of greenhouse gas intensive products and production processes to reduce pollution, and a net increase in indirect taxes with a windfall boost to government revenue. There are at least three overlapping sets of economic efficiency, equity and political acceptance reasons for returning most of the windfall revenue gains to households as compensating income tax reductions and increases in social security payments as a tax mix change package. Most of the indirect tax increases will be passed onto consumers as a higher cost of living, albeit with changes in relative prices. With a likely regressive incidence, some compensation in a close to lump sum form has both equity and political acceptability claims. With no changes in market wages and nominal interest rates, the higher cost of living will further distort the effects of existing income taxes on labour and capital market decisions and their associated efficiency costs. Or, the cost of living increase will provide a catalyst for compensating increases in market wages and nominal interest rates, with the added risk of initiating an inflationary cycle. A tax mix change package has the potential to neutralise the negative effects of the associated increase in indirect taxation. Given the expected time path of increases in the pollution charge on greenhouse gas emissions, and of the windfall increase in indirect tax revenue, the details of new tax mix change package will need to be renegotiated every few years.

Keywords: Resource/Energy; Economics; and; Policy (search for similar items in EconPapers)
Pages: 22
Date: 2011
New Economics Papers: this item is included in nep-ene, nep-env and nep-pbe
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Journal Article: Tax mix change to reduce greenhouse gas emissions (2012)
Journal Article: Tax mix change to reduce greenhouse gas emissions (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aare11:100551

DOI: 10.22004/ag.econ.100551

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