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Böhringer, Christoph
Rivers, Nicholas
Yonezawa, Hidemichi
Year of Publication: 
Series/Report no.: 
Oldenburg Discussion Papers in Economics V-370-14
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.
fiscal externality
climate policy
computable general equilibrium
Document Type: 
Working Paper
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