Climate change policy's interactions with the tax system

This paper presents a range of insights from recent literature on how climate-change policies and other environmental policies interact with the fiscal system. It explores four issues associated with fiscal interactions. First, it examines how these interactions influence the prospects for a “double dividend:” both an environmental improvement and a reduction in the costs of the tax system. Second, it analyzes how the use of revenues from a carbon tax or from a cap-and-trade system involving auctioned emissions allowances influences these policies' economic costs. Third, it addresses the question whether carbon taxes or cap-and-trade programs represent more efficient sources of government revenue than other, more traditional revenue sources such as income, sales, or payroll taxes. Finally, it analyzes how fiscal interactions affect the choice between CO2 emissions-pricing instruments (carbon taxes and cap and trade) and other climate policy instruments.