Ecological Tax Reform Studies

By: Tellus Institute and Pace University Center for Environmental Legal Studies (New York)and Minnesotans for an Energy-Efficient Economy (Minnesota)

Sponsored by: The Energy Foundation, The Wallace Foundation and The Merck Fund (New York) and The Joyce Foundation and The W. Alton Jones Foundation (Minnesota).

Purpose: To study the carbon reduction and economic impacts of recycling carbon dioxide tax revenue.

 Tellus Institute is engaged in two studies of ecological tax reform on the state level. We are examining the impacts of carbon taxes with revenue recycling in New York State and Minnesota. Ecological tax reform is a strategy to help ensure that environmental goals can be met efficiently and equitably, while maintaining healthy economic activity. By placing prices on pollutants, to reflect some of the costs that pollution imposes on human health and the environment, pollution taxes tend to steer producer and consumer decisions towards less polluting technologies, materials, products and consumption patterns. The revenues from the pollution taxes could be recycled back into the economy in a number of ways, including reduction of other taxes, e.g., on business and labor, and/or the promotion of private and public investment on pollution reduction technologies, structures and practices. Tax reform could be structured, or revenues used, to help ensure that the impacts are distributed equitably across income groups and regions. By reducing other taxes or directly investing the pollution tax revenues, the economy can be stimulated and sustained, but with less pollution and more modern, cleaner processes and practices. Our focus on carbon dioxide (CO₂) in these studies is an example of the broader ecological tax reform initiatives that could be pursued.

We are exploring the CO₂ emissions reductions that a CO₂ tax could achieve in the building, industry, transportation and electric sectors. We will estimate the economic impacts of a number of mechanisms for recycling CO₂ tax revenue, including the reduction of some broadbased taxes. The analysis is placed in the context of each state's economic profile and tax structure. One goal of the research is to provide a better understanding of the various strategies that states may wish to implement if CO₂ reductions are mandated at the federal level sometime in the future. Another is to examine strategies that states could initiate independently of federal action. Apart from that, pollution tax recycling is of interest in the context of state tax reform efforts in general, that is, efforts to make state tax systems more efficient and equitable. State tax reform can be addressed and enhanced through the concept of pollution tax recycling. In fashioning tax recycling mechanisms, we are taking into account each state's energy system and industrial make-up.

The studies use an Input-Output approach. Our scenarios are based on research into industry specific energy-efficiency investment potentials and associated technical change on the one hand and on the evaluation of the effects that state tax policies have on industry behavior on the other.