Environmental tax design with endogenous earning abilities (with applications to France)

Helmuth Cremer, Firouz Gahvari, Norbert Ladoux

Research output: Contribution to journalArticlepeer-review

Abstract

This paper studies environmental taxation in a Mirrlees setting with two novel features. First, energy, a polluting good, is used both as a factor of production and a final consumption good; second, the wage is determined endogenously while labor of different individual types remain homogeneous. The model is calibrated for the French economy. We show that: (i) The optimal tax is less than the marginal social damage of emissions and turns into an outright subsidy when the inequality aversion index is high; (ii) the optimal tax on energy as an input is always equal to its marginal social damage; (iii) the social welfare gain due to lowering the current energy taxes to their optimal levels, with the general income tax being set optimally in both cases, is between 17 and 32 euro per household. This hurts the rich and benefits the poor.

Original languageEnglish (US)
Pages (from-to)82-93
Number of pages12
JournalJournal of Environmental Economics and Management
Volume59
Issue number1
DOIs
StatePublished - Jan 2010

Keywords

  • Consumption and intermediate goods
  • Emission taxes
  • Endogenous earning abilities
  • The general income tax
  • Welfare gains

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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