ABSTRACT

Sectoral exemptions from environmental regulation are applied in many countries to avoid adverse adjustment effects in specific industries. The problem with exemptions is that they can make environmental policy more costly. This chapter analyzes the welfare costs of exemptions in environmental policy together with the issue of unilateral carbon taxes in an open economy. Several countries within the EU have introduced or contemplate unilateral taxes to reduce anthropogenic CO2 emissions. Taxes which are unilaterally imposed in an open economy can have significant impacts on production and employment of energy- and export-intensive industries. To save jobs by maintaining “international competitiveness,” most CO2 taxation schemes include exemptions for energy- and export-intensive industries as a compromise between environmental objectives and employment in these sectors. In this chapter, we show that such compromises are costly: as the tax base narrows, the dead-weight loss increases. Our calculations illustrate this point in the framework of a static general equilibrium model for West Germany calibrated to 1990 data. We evaluate the excess costs of exemptions as a means of saving jobs in specific industries relative to an alternative instrument, a uniform carbon tax cum wage subsidy which achieves an identical level of national emissions and employment at a fraction of the cost.

© 1997 Academic Press