Who bears the burden of a tax on carbon emissions

Authors: Don Fullerton Garth Heutel

Publish Date: 2014/09/18

Volume: 8, Issue: 4, Pages: 255-270

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Abstract

We develop a simple general equilibrium model in the style of Harberger to analyze the distributional effects of the proposed “environment tax” on carbon in Japan We derive closedform equations that show how a change in the tax rate affects the economywide return to capital wage and output prices The two main features of the economy that determine the sourcesside incidence of the tax are the factor intensities of the polluting and nonpolluting industries and the elasticity of substitution in production between polluting inputs and labor or capital The input that is a better substitute for pollution usually bears a lower burden of the tax than the other input although we find conditions under which this is not true If the polluting sector is relatively capital intensive then capital can bear a higher burden of the tax Calibrating this model to the Japanese economy we find a tradeoff between these two effects Polluting industries are more capital intensive but capital is likely to be a better substitute for pollution than is labor

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