Revenue-neutral Carbon Tax Research Articles

Is Revenue Neutrality in Carbon Taxation Possible in Practice? Lessons from the Canadian Experience

While the potential economic efficiency, equity, and political acceptability benefits of a revenue-neutral carbon tax have been well studied, a deeper question remains about the feasibility of revenue neutrality in practice. This article provides perspective on this issue by assessing different definitions of revenue neutrality and presenting an in-depth discussion of the motivations for the adoption of revenue-neutral carbon taxes. Two examples of carbon taxes and revenue recycling implemented in Canada are examined: British Columbia's revenue-neutral carbon tax (a carbon tax with offsetting tax cuts) and the Canadian federal government's fuel charge and climate action incentive tax credit (a carbon tax and dividend). The BC case serves to highlight the inherent difficulties of assessing revenue neutrality owing to uncertainty about what would have occurred in the absence of the tax. As time passes following initial implementation of the tax, it becomes increasingly difficult to determine whether, and to what extent, government revenue, income tax rates, the overall tax structure, and the tax base might have differed had the tax not been adopted. The federal example suggests that a carbon tax and dividend policy would be better able to ensure revenue neutrality.

Taxing the heat out of the U.S. food system

This article examines the effectiveness and consequences of using carbon taxes on food purchases to contribute to achieving the U.S. greenhouse gas emissions (GHGEs) reduction target for 2025. Using U.S. Department of Agriculture National Household Food Acquisition and Purchase Survey data and the elasticities derived from the Quadratic Almost Ideal Demand System model, we simulate multiple uncompensated or revenue-neutral carbon tax policy scenarios on different food groups. We apply a carbon tax rate that is proportional to the GHGEs generated throughout each foods lifecycle, computed using Economic Input-Output Life Cycle Assessment. We evaluate the impact of the tax on 1) quantity of GHGEs mitigated and social welfare; 2) nutritional outcomes; 3) distributional implications. Our results show that carbon taxes on food purchases decrease GHGEs from the agricultural and food sectors by 1.9 to 4.8 percent and generate up to $839 billion 2012 dollars social welfare gain per year due to avoided GHGEs-related external costs. However, tradeoffs exist among climate, nutritional and distributional goals. For instance, the most effective policy in reducing GHGEs is regressive and generates the highest loss in consumer surplus per kilogram of emission reduction. Moreover, the quantity of health-promoting nutrients falls significantly in almost all scenarios. Overall, our findings show that the use of carbon taxes alone may not be the most effective way to reduce GHGEs from U.S. food purchases. Additional policies, such as subsidies on less carbon intensive foods, may be needed to encourage consumers of all income level to adopt more sustainable diets without increasing health and social inequalities.

How Do Carbon Taxes Affect Emissions? Plant-Level Evidence from Manufacturing.

This paper investigates how carbon taxes affect emissions by examining British Columbia’s revenue-neutral carbon tax in the manufacturing sector. We theoretically demonstrate that carbon taxes can achieve emission reductions while increasing production. Recycling carbon tax revenues to lower corporate income tax rates encourages investments, allowing plants to emit less per unit of output. Using detailed confidential plant-level data, we evaluate this theoretical prediction by exploiting the treatment intensity through plants’ emission intensity. We find that the carbon tax lowers emissions by 4 percent. Furthermore, we find that the policy had a positive output effect and negative emission intensity effect, suggesting that the carbon tax encouraged plants to produce more with less energy. We provide initial evidence showing how a revenue-neutral carbon tax may achieve emission reductions while stimulating the economy.

Environmental taxes and productivity: Lessons from Canadian manufacturing

This paper investigates how environmental taxes affect manufacturing productivity by examining British Columbia’s revenue-neutral carbon tax. I develop a new hypothesis, the “Productivity Dividend Hypothesis,” to show that environmental taxes can positively affect productivity by recycling tax revenues to reduce corporate income taxes. This revenue-recycling increases investment and could raise productivity more than environmental taxes lower productivity by diverting resources from production. I evaluate this hypothesis using detailed confidential plant-level data. I find that the carbon tax lowers productivity, although this is offset to some extent by the revenue-recycling. For some plants, the policy generates a net gain in productivity.

The Impact of a Revenue-Neutral Carbon Tax on GDP Dynamics: The Case of British Columbia

We study the impact over time of revenue-neutral-designed carbon taxes on GDP in the Canadian province of British Columbia (B.C.). The tax is broad-based, and all rate hikes and their timings were pre-announced. Our time series approach accounts for these pre-announcement effects, as well as for the possible saliency of the tax. Estimated impulse response functions and statistical comparisons of GDP dynamics in the presence and (counterfactual) absence of carbon taxes lead to the same result. Overall, revenue-neutral carbon taxation has no significant negative impacts on GDP. Our setup also allows us to examine the extent of the carbon tax pass-through into energy prices. We find that pass-through is complete. We conclude that implementing revenue-neutral carbon taxation contributes to lowering harmful greenhouse gases into the atmosphere without hurting the economy.

Is Revenue-Neutrality of Carbon Taxation Possible in Practice? Two Case Studies From Canada

Despite the potential economic efficiency and political economy benefits of revenue-neutrality, a deeper question remains about the feasibility of revenue-neutrality in practice. Revenue-neutrality is relatively simple to implement in an economic model, as counterfactuals are clearly defined. However, it is less clear in practice when a government actually implements a carbon tax what income tax or transfer levels would have been if the carbon tax had not been implemented. This paper aims to provide some perspective on this issue by presenting two examples of carbon taxes and revenue recycling implemented in Canada: the British Columbia revenue-neutral carbon tax (a carbon tax with offsetting tax cuts) and the Canadian federal government’s Fuel Charge and Climate Action incentive refundable tax credit (a carbon tax and dividend). Is revenue-neutrality possible in a practical sense with either of these types of policies, or is it at best a marketing gimmick to help sell carbon taxes to voters?

The Ends and Means of Decarbonization: The Green New Deal in Context

Disputes about climate policy involve much more than whether or not to reduce greenhouse gas emissions. There is general agreement among proponents of climate policy that strategies should be cost effective, should address distributional impacts, and should incentivize investments in low-carbon technologies. Yet disagreements abound regarding additional goals of climate policy design. Decarbonizing the economy means changing the sources of energy we use, how we transport people and products, how we produce food, and which resources we consume. Yet even among proponents of federal climate legislation there is strong disagreement regarding policy instruments. Recent proposals for a revenue-neutral carbon tax and a Green New Deal (GND) frame the opposite ends of the debate. On one end, the GND framework treats climate policy as an opportunity to steer the trajectory of the U.S. economy while also correcting social and environmental injustices. Proponents of the most expansive iterations of a GND argue that it is not possible to separate justice and economic considerations from environmental policy. At the other end of the spectrum, revenue-neutral carbon tax proposals reject the creation of new government programs and focus on controlling greenhouse gas emissions rather than the economic and social impacts of the policy. This Essay identifies core disputes about the non-emission goals in state and federal climate policy debates that create barriers to legislative consensus. The Essay begins with a comparison of recent proposals to mitigate climate change, including pricing carbon via a carbon market or carbon tax, regulatory measures such as the Obama-era Clean Power Plan, state-based policies, and the GND. It then identifies three conflicts, the resolution of which will shape future climate policy developments: the role of decarbonization as technology policy, social justice policy, and fiscal policy. Deploying low carbon technologies is a critical piece of the climate mitigation puzzle, but stakeholders disagree whether decarbonization strategies should prioritize renewable energy or include technologies such as nuclear or carbon capture. Each policy discussed in this Essay considers some range of social impacts (at minimum, cost increases), but differ significantly about which social impacts to address and the how to address them. The policies also adopt different approaches to the link between fiscal policy and climate policy, with some generating revenue to fund new government programs, some returning revenue to U.S. citizens, and some not addressing the issue. The Essay concludes with comments about the early impacts of the GND on the domestic policy debate and opportunities to resolve.

Distributional effects of carbon taxation in passenger transport with lump-sum offset: low income households, retirees and families would benefit in Germany

BackgroundThe introduction of a carbon tax on passenger transport is currently being discussed in Germany. Various stakeholders favour a consumption-based, revenue-neutral carbon tax with a uniform lump-sum offset for private households and a tax rate of 40 € per ton of CO2.ObjectiveIn this study, we examine the distributional effects of carbon taxation for the German passenger transport sector under the assumption of the proposed tax model. We discuss as to what extent which socioeconomic groups would be burdened and who might even benefit from carbon taxation. To answer these questions we use a uniquely modelled data set that encompasses all forms of passenger transport (i.e. in Germany and abroad) of the German resident population over 1 year. The national household travel survey Mobility in Germany 2017 is the basis of the microscopic data set. We derive annual CO2 emissions and carbon tax burdens for various population groups using the data on passenger transport, as well as specific emission factors.ResultsResults show that low income households, retirees, single parents and family households with two or more children would benefit from the proposed carbon taxation scheme due to below-average emissions per person; in contrast, working age households without children and car owners with heavy car use would be burdened. Our results are of particular relevance to transport researchers, transport politicians and decision makers as a basis for designing, developing and introducing a carbon taxation scheme.

Carbon Tax Shifts and the Revenue-Neutrality Dilemma

Over the past two decades, numerous experts and politicians have proposed “revenue-neutral carbon tax shifts,” under which a government implements a carbon tax and uses the resulting revenue to cut other taxes by an equal dollar amount. These proposals commonly include legal or political mechanisms to bind governments to revenue neutrality over time. This Article’s central claim is that revenue neutrality suffers from conceptual and epistemic confusion that should lead to reconsideration of the policy merits of carbon tax shifts. To illustrate the argument, the Article provides the first retrospective review in the legal literature of carbon tax shifts from four jurisdictions, two of which were implemented and then repealed, and two of which were rejected by voters at the ballot box. In each jurisdiction, the carbon tax shift was afflicted by confusion between two substantially different conceptions of revenue neutrality, which can be termed “backward-looking” and “sideways-looking” revenue neutrality. This confusion is difficult to resolve because the choice between the two conceptions presents governments with a dilemma: backward-looking revenue neutrality is normatively undesirable, while sideways-looking revenue neutrality is difficult to enforce through legal and political mechanisms. This Article argues that the dilemma should be taken into account when choosing between carbon tax shifts and alternative uses of carbon pricing revenues. The dilemma also has implications for revenue-neutral tax reform in other contexts: it is far harder to separate the question of “how to tax” from the question of “how much to tax” than is commonly understood.

The Impact of a Revenue Neutral Carbon Tax on Substitution of Natural Gas for Coal in the Electricity Sector

The Impact of a Revenue Neutral Carbon Tax on Substitution of Natural Gas for Coal in the Electricity Sector

The long and short run effects of British Columbia's carbon tax on diesel demand

In 2008, the government of the province of British Columbia (B.C.) broke new ground in North America by introducing a revenue-neutral carbon tax on fossil fuel use. The rate was initially set at $10/ton of CO2 and then raised annually by increments of $5 to reach $30/ton in 2012. We measure the impact of the tax on diesel users; these are primarily businesses involved in heavy industries, mining, construction, and commercial transportation, and they represent 18.2% of B.C. fossil fuel emissions. Based on a cointegration equation and a related error-correction model, we find that, over 2008–2016, the combined long and short run carbon tax impact has resulted in an average of 5.85 cent/litre increase at the pump, and a reduction of 1.24 L in monthly per capita diesel consumption. The average annual reduction amounts to 1.3% of B.C. 2008 diesel emissions and 0.2% of total emissions in the province in that same year. This decrease is relatively modest when we consider Canada's Paris Agreement commitment to reduce GHG emissions by 30% by the year 2030.

Effects of B.C.’s Carbon Tax on GDP

The province of British Columbia, Canada, introduced a broad-based revenue-neutral carbon tax in July 2008; the rate was set to $10/tonne of CO2 initially, increased annually by $5/tonne until 2012 to reach $30/tonne, and remained at that level until 2017. We use the experience related to this unique initiative to shed some light on the controversy regarding the nature of the relationship between environmental taxes and overall economic activity. In particular, we test whether gasoline and diesel carbon taxes had any impact on GDP changes of the province, either positive or negative. Having found no evidence of asymmetry in the price impact, our analysis is conducted in the context of a standard VAR framework. We conclude that there is no statistically significant effect of carbon taxes on GDP change. The result is supported by tests on slope coefficient estimates as well as via dynamic simulations with and without carbon tax. We also find evidence of complete pass-through of carbon tax into price over time.

Psychological Barriers to Bipartisan Public Support for Climate Policy

Psychological scientists have the expertise—and arguably an obligation—to help understand the political polarization that impedes enactment of climate policy. Many explanations emphasize Republican skepticism about climate change. Yet results from national panel studies in 2014 and 2016 indicate that most Republicans believe in climate change, if not as strongly as Democrats. Political polarization over climate policy does not simply reflect that Democrats and Republicans disagree about climate change but that Democrats and Republicans disagree with each other. The results of a national panel experiment and of in-depth interviews with four former members of Congress suggest that Democrats and Republicans—both ordinary citizens and policymakers—support policies from their own party and reactively devalue policies from the opposing party. These partisan evaluations occur both for policies historically associated with liberal principles and politicians (cap-and-trade) and for policies associated with conservative principles and politicians (revenue-neutral carbon tax). People also exaggerate how much other Democrats and Republicans are swayed by partisanship. This foments false norms of partisan opposition that, in turn, influence people’s personal policy support. Correcting misperceived norms of opposition and decoupling policy evaluation from identity concerns would help overcome these seemingly insurmountable barriers to bipartisan support for climate policy.

Climate change as a polarizing cue: Framing effects on public support for low-carbon energy policies

Abstract This study examines how public support for four specific low-carbon energy policies (renewable energy investment, revenue-neutral carbon tax, fuel efficiency regulations, expansion of nuclear power) varies when these policies are framed as a way to reduce either climate change, air pollution, or energy dependence. A survey question wording experiment with a nationally representative U.S. sample is utilized. We find framing effects only among Republicans, whose policy support was lower in response to the climate change frame versus the air pollution and energy security frames for all policies except nuclear power. This suggests that framing effects are conditional on political partisanship and policy content. When testing the processing mechanism behind these effects, we find no evidence that the climate change frame functions as a simple heuristic; rather, the findings are consistent with motivated reasoning, whereby the framing effects on policy support are mediated by the policy’s perceived relative benefits and costs.

On the labor market consequences of environmental taxes

This paper uses individual-level data to estimate the labor market consequences of environmental policies. The focus on workers rather than industries as the unit of analysis allows me to investigate previously unobserved outcomes, such as (i) unemployment rates, labor force participation rates, and the natures of layoffs and new hires and (ii) the distributional effects of these policies, both of which are critical to understanding costs and their distributions associated with environmental policies. Exploiting the introduction of a revenue-neutral carbon tax in British Columbia (BC), I find that environmental taxes, though revenue-neutral, tax away jobs disproportionately, more likely from less-educated workers. In particular, the policy increases the unemployment rates of medium- and low-educated males by 1.4 and 2.4 percentage points, respectively. The policy is implemented mainly at the expense of the low-educated: because of these job losses, some engage in temporary and part-time jobs, and, eventually, some, being discouraged workers, leave the labor force, with the caveat that the effects could, though unlikely, be partially driven by an unobserved differential shock to BC's labor market.

Carbon Tax Saliency: The Case of B.C. Diesel Demand

In 2008, the government of the province of British Columbia broke new ground in North America by introducing a revenue-neutral carbon tax on fossil fuels. The initial rate was set at $10/ton of CO2 which was then increased annually by $5 increments to reach $30/ton in 2012. We focus on monthly diesel use which is mostly related to commercial activities. Our objective is to measure user reaction to the new tax. Exploiting the sample time series properties, we study the long run reaction via a cointegration equation, linking diesel use, its total price, and income, and the short run reaction using an error correction model (ECM). Carbon tax saliency is interpreted as a short run phenomenon that shows up in the dynamic adjustment of the ECM. We find that the long run total price elasticity estimate of diesel demand is -0.52 and that the short run tax saliency effect is statistically significant. However, the total reaction is small relative to Canada’s commitment to decrease GHG emissions by 30% in 2030 relative to 2005 levels.

Jobs and climate policy: Evidence from British Columbia's revenue-neutral carbon tax

This paper examines the employment impact of British Columbia's revenue-neutral carbon tax implemented in 2008. While all industries appear to benefit from the redistributed tax revenues, the most carbon-intensive and trade-sensitive industries see employment fall with the tax, while clean service industries see employment rise. By aggregating across industries I find the BC carbon tax generated, on average, a small but statistically significant 0.74 percent annual increases in employment over the 2007–2013 period. This paper provides initial evidence showing how a revenue-neutral carbon tax may not adversely affect employment.

Carbon Tax Saliency: The Case of B.C. Diesel Demand

In 2008, the government of the province of British Columbia broke new ground in North America by introducing a revenue-neutral carbon tax on fossil fuels. The initial rate was set at $10/ton of CO2 which was then increased annually by $5 increments to reach $30/ton in 2012. We focus on monthly diesel use which is mostly related to commercial activities. Our objective is to measure user reaction to the new tax. Exploiting the sample time series properties, we study the long run reaction via a cointegration equation, linking diesel use, its total price, and income, and the short run reaction using an error correction model (ECM). Carbon tax saliency is interpreted as a short run phenomenon that shows up in the dynamic adjustment of the ECM. We find that the long run total price elasticity estimate of diesel demand is -0.52 and that the short run tax saliency effect is statistically significant. However, the total reaction is small relative to Canada’s commitment to decrease GHG emissions by 30% in 2030 relative to 2005 levels.

Economic prospect on carbon emissions in Commonwealth of Independent States

This paper measures the ecological performance and reference carbon taxes of 12 Commonwealth of Independent States between 1993 and 2008. I adapted an ecologist’s model into widely used non-parametric directional distance functions approach. On average, countries perform fairly well: eco-efficiency is around 87 %. Enhancing energy consumption would lead to further reductions in CO2 emissions. I find that there was a relative decoupling of GDP from emissions growth. The estimated shadow price of carbon (mean of US$74.37/tCO2) is reasonable and falls into a range proposed by climate scientists. The richer countries had lower shadow prices with smaller range compared to less affluent ones. Overall, given decoupling, the introduction of revenue-neutral carbon tax could have certain merits.

Behavioral Public Choice and the Carbon Tax

In response to the historic Paris Agreement on climate change and to the Environmental Protection Agency’s recently finalized Clean Power Plan, economists and other climate policy experts have renewed the call for the United States to adopt a carbon tax. Opposition among the public presents a major obstacle. While a majority of the public supports government action on climate change, most people favor the use of “green” subsidies and command-and-control regulations—a fact that frustrates economists of all political stripes who contend that a carbon tax would be much cheaper and more effective. This Article argues that a cognitive bias known as opportunity cost neglect pervades the public’s thinking about climate policy instruments, causing people to ignore the hidden costs of subsidies and command-and-control and, for that reason, to support these less efficient alternatives to the carbon tax. The Article will help proponents of the carbon tax better tailor their advocacy efforts. The Article also contributes to the burgeoning literature on behavioral public choice, which shows how the cognitive biases of political actors (including voters) influence the law. In addition, the Article points to the possibility of a Pyrrhic victory for conservative policymakers who oppose the carbon tax. Rather than averting major government action on global warming, defeating the carbon tax will very likely facilitate adoption of more costly substitutes that the public strongly favors as a result of cognitive bias. In that respect, the Article lends support to recent proposals by a small but growing group of conservative scholars who argue for a policy swap in which conservatives agree to a revenue-neutral carbon tax in exchange for support from environmentalists for abandoning the government’s current regulatory approach. The Article also suggests that conservative policymakers rethink their position on the carbon tax given that the states are currently considering which policy options to pursue in satisfying their respective obligations to reduce carbon emissions under the Clean Power Plan.