IDEAS home Printed from https://ideas.repec.org/p/old/dpaper/370.html
   My bibliography  Save this paper

Vertical fiscal externalities and the environment

Author

Listed:
  • Christoph Böhringer

    (University of Oldenburg, Department of Economics)

  • Nicholas Rivers

    (University of Ottawa)

  • Hidemichi Yonezawa

    (University of Ottawa)

Abstract

We show that imposition of a state-level environmental tax in a federation crowds out preexisting federal taxes. We explain how this vertical fiscal externality can lead unilateral statelevel environmental policy to generate a welfare gain in the implementing state, at the expense of other states. Using a computable general equilibrium model of the Canadian federation, we show that vertical fiscal externalities can be the major determinant of the welfare change following environmental policy implementation by a state government. Our numerical simulations indicate that - as a consequence of vertical fiscal externalities - state governments can reduce greenhouse gas emissions by over 20 percent without any net cost to themselves.

Suggested Citation

  • Christoph Böhringer & Nicholas Rivers & Hidemichi Yonezawa, 2014. "Vertical fiscal externalities and the environment," Working Papers V-370-14, University of Oldenburg, Department of Economics, revised Nov 2014.
    • Handle: RePEc:old:dpaper:370
    as

    Download full text from publisher

    File URL: http://www.uni-oldenburg.de/fileadmin/user_upload/wire/fachgebiete/vwl/V-370-14.pdf
    File Function: First version, 2014
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May.
    2. Krichene, Noureddine, 2002. "World crude oil and natural gas: a demand and supply model," Energy Economics, Elsevier, vol. 24(6), pages 557-576, November.
    3. Christoph Böhringer & Nicholas Rivers & Thomas Rutherford & Randall Wigle, 2015. "Sharing the burden for climate change mitigation in the Canadian federation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(4), pages 1350-1380, November.
    4. Barry G. Rabe, 2008. "States on Steroids: The Intergovernmental Odyssey of American Climate Policy," Review of Policy Research, Policy Studies Organization, vol. 25(2), pages 105-128, March.
    5. Michael Keen, 1998. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 454-485, September.
    6. Esteller-More, Alex & Sole-Olle, Albert, 2001. "Vertical income tax externalities and fiscal interdependence: evidence from the US," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 247-272, April.
    7. Brulhart, Marius & Jametti, Mario, 2006. "Vertical versus horizontal tax externalities: An empirical test," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2027-2062, November.
    8. Wallace E. Oates & Wallace E. Oates, 2004. "An Essay on Fiscal Federalism," Chapters, in: Environmental Policy and Fiscal Federalism, chapter 22, pages 384-414, Edward Elgar Publishing.
    9. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
    10. Lawrence H. Goulder & Ian W.H. Parry & Roberton C. Williams III & Dallas Burtraw, 2002. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 27, pages 523-554, Edward Elgar Publishing.
    11. Ringlund, Guro Bornes & Rosendahl, Knut Einar & Skjerpen, Terje, 2008. "Does oilrig activity react to oil price changes An empirical investigation," Energy Economics, Elsevier, vol. 30(2), pages 371-396, March.
    12. Wallace E. Oates & Wallace E. Oates, 2004. "A Reconsideration of Environmental Federalism," Chapters, in: Environmental Policy and Fiscal Federalism, chapter 7, pages 125-156, Edward Elgar Publishing.
    13. David M. Konisky, 2007. "Regulatory Competition and Environmental Enforcement: Is There a Race to the Bottom?," American Journal of Political Science, John Wiley & Sons, vol. 51(4), pages 853-872, October.
    14. Böhringer, Christoph & Lange, Andreas & Rutherford, Thomas F., 2014. "Optimal emission pricing in the presence of international spillovers: Decomposing leakage and terms-of-trade motives," Journal of Public Economics, Elsevier, vol. 110(C), pages 101-111.
    15. Lutsey, Nicholas & Sperling, Daniel, 2008. "America's bottom-up climate change mitigation policy," Energy Policy, Elsevier, vol. 36(2), pages 673-685, February.
    16. Kunce, Mitch & Shogren, Jason F., 2005. "On interjurisdictional competition and environmental federalism," Journal of Environmental Economics and Management, Elsevier, vol. 50(1), pages 212-224, July.
    17. Ian W.H. Parry, 2002. "Pollution Taxes and Revenue Reycling," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 15, pages 235-248, Edward Elgar Publishing.
    18. Williams, Roberton C., 2012. "Growing state–federal conflicts in environmental policy: The role of market-based regulation," Journal of Public Economics, Elsevier, vol. 96(11), pages 1092-1099.
    19. Azusa OKAGAWA & Kanemi BAN, 2008. "Estimation of substitution elasticities for CGE models," Discussion Papers in Economics and Business 08-16, Osaka University, Graduate School of Economics.
    20. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
    21. Yazid Dissou & Lilia Karnizova & Qian Sun, 2015. "Industry-level Econometric Estimates of Energy-Capital-Labor Substitution with a Nested CES Production Function," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 107-121, March.
    22. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, April.
    23. Levinson, Arik, 2003. "Environmental Regulatory Competition: A Status Report and Some New Evidence," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 91-106, March.
    24. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
    25. Lutsey, Nicholas P. & Sperling, Dan, 2008. "America's Bottom-Up Climate Change Mitigation Policy," Institute of Transportation Studies, Working Paper Series qt8jj755d4, Institute of Transportation Studies, UC Davis.
    26. Christoph Böhringer & Knut Rosendahl, 2010. "Green promotes the dirtiest: on the interaction between black and green quotas in energy markets," Journal of Regulatory Economics, Springer, vol. 37(3), pages 316-325, June.
    27. Christoph Böhringer & Thomas Rutherford, 2002. "Carbon Abatement and International Spillovers," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 391-417, July.
    28. Graham, Paul & Thorpe, Sally & Hogan, Lindsay, 1999. "Non-competitive market behaviour in the international coking coal market," Energy Economics, Elsevier, vol. 21(3), pages 195-212, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Coria, Jessica & Hennlock, Magnus & Sterner, Thomas, 2021. "Interjurisdictional externalities, overlapping policies and NOx pollution control in Sweden," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    2. Zhang, Zengkai & Zhang, Zhongxiang, 2017. "Intermediate input linkage and carbon leakage," Environment and Development Economics, Cambridge University Press, vol. 22(6), pages 725-746, December.
    3. Taran Faehn & Gabriel Bachner & Robert Beach & Jean Chateau & Shinichiro Fujimori & Madanmohan Ghosh & Meriem Hamdi-Cherif & Elisa Lanzi & Sergey Paltsev & Toon Vandyck & Bruno Cunha & Rafael Garaffa , 2020. "Capturing Key Energy and Emission Trends in CGE models: Assessment of Status and Remaining Challenges," Journal of Global Economic Analysis, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, vol. 5(1), pages 196-272, June.
    4. Waldemar Marz, 2019. "Climate Policy and Inequality in Two-Dimensional Political Competition," ifo Working Paper Series 319, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    5. Beck, Marisa & Rivers, Nicholas & Wigle, Randall & Yonezawa, Hidemichi, 2015. "Carbon tax and revenue recycling: Impacts on households in British Columbia," Resource and Energy Economics, Elsevier, vol. 41(C), pages 40-69.
    6. Jared C. Carbone & Nicholas Rivers & Akio Yamazaki & Hidemichi Yonezawa, 2020. "Comparing Applied General Equilibrium and Econometric Estimates of the Effect of an Environmental Policy Shock," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 7(4), pages 687-719.
    7. Waldemar Marz, 2019. "Complex dimensions of climate policy: the role of political economy, capital markets, and urban form," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 85.
    8. Atsushi Yamagishi, 2019. "Transboundary pollution, tax competition and the efficiency of uncoordinated environmental regulation," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(3), pages 1165-1194, August.
    9. Dietrich Earnhart & Lana Friesen, 2021. "Enforcement Federalism: Comparing the Effectiveness of Federal Punishment versus State Punishment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(2), pages 227-255, February.
    10. Roolfs, Christina & Gaitan, Beatriz & Edenhofer, Ottmar, 2021. "Make or brake — Rich states in voluntary federal emission pricing," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    11. Jia, Zhijie & Lin, Boqiang, 2022. "CEEEA2.0 model: A dynamic CGE model for energy-environment-economy analysis with available data and code," Energy Economics, Elsevier, vol. 112(C).
    12. Zenglian Zhang & Wenju Zhao, 2018. "Research on Financial Pressure, Poverty Governance, and Environmental Pollution in China," Sustainability, MDPI, vol. 10(6), pages 1-24, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Millimet, Daniel L., 2013. "Environmental Federalism: A Survey of the Empirical Literature," IZA Discussion Papers 7831, Institute of Labor Economics (IZA).
    2. Boadway, Robin & Tremblay, Jean-François, 2012. "Reassessment of the Tiebout model," Journal of Public Economics, Elsevier, vol. 96(11), pages 1063-1078.
    3. Brulhart, Marius & Jametti, Mario, 2006. "Vertical versus horizontal tax externalities: An empirical test," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2027-2062, November.
    4. Sotiris Karkalakos & Christos Kotsogiannis, 2007. "A spatial analysis of provincial corporate income tax responses: evidence from Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(3), pages 782-811, August.
    5. Fredriksson, Per G. & Mamun, Khawaja A., 2008. "Vertical externalities in cigarette taxation: Do tax revenues go up in smoke?," Journal of Urban Economics, Elsevier, vol. 64(1), pages 35-48, July.
    6. Boadway, Robin & Tremblay, Jean-François, 2010. "Mobility and Fiscal Imbalance," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(4), pages 1023-1053, December.
    7. Crivelli, Ernesto & Volpe Martincus, Christian, 2007. "Horizontal and Vertical Tax Externalities in a Multicountry World," Bonn Econ Discussion Papers 8/2007, University of Bonn, Bonn Graduate School of Economics (BGSE).
    8. Florence TOUYA, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers 9, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Nov 2009.
    9. Florence Lachet-Touya, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working papers of CATT hal-03551027, HAL.
    10. Florence Lachet-Touya, 2009. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers hal-03551027, HAL.
    11. Fredriksson, Per & Mamun, Khawaja, 2009. "Gubernatorial Reputation and Vertical Tax Externalities: All Smoke, No Fire?," Working Papers 2009002, Sacred Heart University, John F. Welch College of Business.
    12. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working papers of CATT hal-02939340, HAL.
    13. Geys, Benny & Konrad, Kai A., . "Federalism and optimal allocation across levels of governance," Chapters in Economics,, University of Munich, Department of Economics.
    14. Ida, Tomoya & Wilhelmsson, Mats, 2014. "An Empirical Test Of The Dominant Tax Externality In Sweden," Working Paper Series 14/5, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    15. Florence Lachet-Touya, 2013. "Tax Interactions with Asymmetric Information and Nonlinear Instruments," Working Papers hal-02945285, HAL.
    16. Florence Lachet-Touya, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers hal-02939340, HAL.
    17. Florence TOUYA, 2016. "EU tax competition and tax avoidance: A multiprincipal perspective," Working Papers 2015-2016_11, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Aug 2016.
    18. Florence Lachet-Touya, 2016. "Horizontal and Vertical Tax Interactions in a Common Agency Game," Working Papers hal-02939399, HAL.
    19. Perez-Sebastian, Fidel & Raveh, Ohad & Reingewertz, Yaniv, 2019. "Heterogeneous vertical tax externalities and macroeconomic effects of federal tax changes: The role of fiscal advantage," Journal of Urban Economics, Elsevier, vol. 112(C), pages 85-110.
    20. Perez-Sebastian, Fidel & Raveh, Ohad, 2018. "What drives vertical fiscal interactions? Evidence from the 1980 Crude Oil Windfall Act," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 251-268.

    More about this item

    Keywords

    fiscal externality; climate policy; federalism; computable general equilibrium;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:old:dpaper:370. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catharina Schramm (email available below). General contact details of provider: https://edirc.repec.org/data/fwoldde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.