Prof. Dr. Christoph Böhringer
BC3 Seminars: Vertical Fiscal Externalities and the Environment
BC3-Basque Centre for Climate Change Sede Building 1, 1st floor, Scientific Park of the University of the Basque Country, Leioa, Bizkaia, SpainProf. Dr. Christoph Böhringer
Chair of Economic Policy Department of Economics, University of Oldenburg
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 state-level 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.