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

Lans Bovenberg and Lawrence H. Goulder

No 4897, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H21 H23 (search for similar items in EconPapers)
Date: 1994-10
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Published as American Economic Review, Vol. 86, no. 4 (September 1996): 985-1006. Published as "Costs of Environmentally Motivated Taxes in the Presence of Other Taxes: General Equilibrium Analyses", NTJ, Vol. 50, no. 1 (March 1997.

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