There are a number of sensitive issues in the debate about how to interpret cost estimates generated by different models, including assumptions about tax recycling, target setting, and international co-operative mechanisms.
Tax recycling issues revolve around two critical points concerning the interactions between existing tax systems and a tax system that integrates carbon taxes:
The net cost of climate policy depends on (1) the structure of the tax system prior to the introduction of the mitigation policy and (2) the nature of the mitigation policy (e.g., which sectors are covered, what tax instruments are employed, and the way that revenues are recycled). Estimates of the size of the effect are discussed in Chapter 8. This is closely related to the double-dividend literature, which is discussed in Section 220.127.116.11. As noted there, the welfare loss (or burden) of a given climate policy depends on the structure of existing taxes. The more distorted the pre-existing tax the higher the welfare loss. This means that a carbon tax can result in either a totally increased burden (welfare loss of the whole tax system) or a double dividend (in which the total welfare loss of the tax system is lower because the carbon tax substitutes other burdensome taxes). In general, however, a larger benefit from a carbon tax is found in comparison with other instruments that meet the Kyoto Protocol targets (e.g., permits issued gratis) than is found in comparison between different methods of recycling.
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