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Implicit carbon prices

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  • Belfiori, Elisa
  • Rezai, Armon

Abstract

Climate and fiscal policy interact closely. The former imposes explicit prices for carbon emissions, while the latter affects emissions implicitly. We study the correspondence between explicit and implicit carbon pricing of a Ramsey-optimal fiscal policy in a neoclassical growth model of climate change. Our central result is that any arbitrary sequence of explicit carbon prices can be achieved implicitly through a blend of conventional taxes (e.g., consumption, energy, and income taxes), when lump-sum transfers are available. In a Ramsey setting, policy balances these taxes’ traditional revenue-raising role with the Pigouvian role of fixing the climate externality. We characterize the Ramsey and Pigouvian components of optimal tax rates. We show that explicit carbon pricing is implicitly implementable through a mix of conventional taxes also in this framework. We extend these findings to scenarios compatible with net-zero emissions, adding carbon capture technologies and a cap on cumulative emissions.

Suggested Citation

  • Belfiori, Elisa & Rezai, Armon, 2024. "Implicit carbon prices," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    • Handle: RePEc:eee:jeeman:v:125:y:2024:i:c:s009506962400024x
    DOI: 10.1016/j.jeem.2024.102950
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; Optimal taxation; Tax equivalence; Implicit carbon prices;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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