Tax Policy to Combat Global Warming: On Designing a Carbon Tax

James Poterba

No 3649, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops several points concerning the design and implementation of a carbon tax. First, if implemented without any offsetting changes in transfer programs, the carbon tax would be regressive. This regressivity could be offset with changes in either the direct tax system or transfers. Second, the production and consumption distortions associated with small carbon taxes, on the order of $5/ton of carbon, are relatively small: less than $1 billion per year for the United States. Stabilizing carbon dioxide emissions at their 1988 levels by the year 2000, however, would require a carbon tax ten to twenty times this size. It would more than triple the producer price of coal and nearly double the producer prices of petroleum and natural gas, would have much more significant private efficiency effects. Third, a central issue of carbon tax design is harmonization with other fiscal instruments designed to reduce greenhouse warming. Ensuring comparability between taxes rates on chlorofluorocarbons and fossil fuels is particularly important to avoid unnecessary distortions in production or consumption decisions.

Date: 1991-03
Note: PE
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Citations: View citations in EconPapers (110)

Published as Global Warming: Economic Policy Responses, edited by Rudiger Dornbusch and James M. Poterba, pp. 71-98. Cambridge, MA: MIT Press, 1991.

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