Measuring the Welfare Effects of Tax Changes Using the LES: An Application to a Carbon Tax

Antonia Cornwell and John Creedy

Empirical Economics, 1997, vol. 22, issue 4, 589-613

Abstract: This paper explores the use of a parametric approach to the measurement of compensating and equivalent variations resulting from price changes. The approach is based on the application of the Linear Expenditure System (LES) to each of a range of household income groups, rather than being based on a "representative" consumer. The method is then used to examine the distributional effects of a carbon tax, designed to reduce carbon dioxide emissions. The price changes resulting from a carbon tax depend on the "carbon intensities" of each good, which depend in turn on the nature of inter-industry transactions (the input-output matrix). The use of transfer payments to compensate for adverse distributional effects of a carbon tax is investigated, using social welfare functions based on equivalent incomes.

Date: 1997
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Working Paper: Measuring the Welfare Effects of Tax Changes Using the Les: An Application to the Carbon Tax (1995)
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