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EMF WP 12.8: The Efficiency Value of Carbon Tax Revenues

A suite of economic models of the U.S. economy – two macroeconometric and two computable general equilibrium models – are used to examine the consequences of mitigating carbon dioxide (CO 2) emissions by imposing carbon taxes while recycling the revenues in various ways. The results indicate that in addition to their efficacy as Pigouvian taxes that reduce a negative externality, carbon taxes can be used to reduce distortions created by other taxes. The costs of a carbon tax may be largely and perhaps even fully offset by taking advantage of its efficiency value and using the revenues to cut existing taxes that discourage capital formation or labor supply. The results depend in part on whether costs are measured in terms of changes in GNP, consumption, or welfare. As with all studies of the economics of climate change mitigation, the results are sensitive to assumptions about future rates of technological change and the ease of substitutability between fossil fuels and other factors of production.