9310362 Goulder In recent years there has been a significant increase in interest in the potential of taxes as instruments of environmental policy. This interest has stimulated many simulation studies to investigate the economic costs and benefits of environmental taxes. To date, nearly all such studies have suffered from two important limitations. First, they tend to assume that the revenues earned by such taxes are returned to the economy in lump-sum fashion. This may lead to an overstatement of economic costs because it overlooks the offsetting efficiency gains that would accrue from using revenues to reduce existing distortionary taxes. A second limitation is the assumption that environmental taxes are imposed in a system without pre-existing tax distortions. Recent analytical work indicates, however, that pre-existing taxes in commodity and factor markets can importantly influence the costs of newly imposed environmental taxes. For this study the investigator will apply a dynamic general equilibrium model to evaluate major potential environmental tax initiatives. The model combines a close attention to U.S. taxes with attention to energy sector interactions, conversions to backstop technologies, and capital adjustment dynamics. These features distinguish the model from other general equilibrium models that examine energy and environmental tax initiatives and make it particularly useful for evaluating revenue-neutral environmental taxes in a second best economy. This investigation includes three main tasks. The first is to apply the model to evaluate major potential environmental tax initiatives. These include carbon taxes, taxes on carbon and on sources of other greenhouse gases, subsidies to carbon sinks, BTU taxes, and gasolines taxes. Under each tax several policy variants will be considered, including alternative methods for revenue replacement and alternative treatments of internationally traded goods. These policies will be examine d along many dimensions, including effects on aggregate income and consumption and on industry profits and output. Policies will be compared in terms of their costs in achieving given emissions reductions. The second main task is to use the model (through counterfactual simulation) to clarify and quantify the relationships between the magnitudes of pre-existing taxes and the costs of achieving emissions reductions. This work is intended to generate insights as to the comparative costs of revenue-neutral environmental taxes in nations where pre-existing tax rates differ significantly from those in the U.S. The third main task is to perform econometric and other work to improve the empirical foundations of the model. The econometric work includes estimation of industry production functions and household demand functions. ***
