Vertical fiscal externalities and the environment

Christoph Böhringer, Nicholas Rivers and Hidemichi Yonezawa

No 16/234, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

Abstract: We show that imposition of a state-level environmental tax in a federation crowds out pre-existing federal taxes. We explain how this vertical fiscal externality can lead unilateral state-level environmental policy to generate a welfare gain in the implementing state, at the expense of other states, even absent any environmental benefits. Using a computable general equilibrium model of the Canadian federation, we show that vertical fiscal externalities can be the major determinant of the welfare change following environmental policy implementation by a state government. Our numerical simulations indicate that - as a consequence of vertical fiscal externalities - state governments can reduce greenhouse gas emissions by over 20 percent without any net cost to themselves.

Keywords: fiscal externality; climate policy; federalism; computable general equilibrium (search for similar items in EconPapers)
JEL-codes: C68 H77 Q54 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2016-03
New Economics Papers: this item is included in nep-cmp, nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Vertical fiscal externalities and the environment (2016)
Working Paper: Vertical Fiscal Externalities and the Environment (2014)
Working Paper: Vertical fiscal externalities and the environment (2014)
Working Paper: Vertical fiscal externalities and the environment (2014)
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