Although it is well-established that taxes have a distortionary and negative effect on the economy, not all taxes are equally deleterious. This study examines the effect of a revenue neutral tax on Carbon Emissions, using the Energy 2020 and REMI models. The revenue raised by the carbon tax is offset by corresponding reductions in other taxes (property and payroll taxes). The results indicate that the carbon emissions tax may or may not be as negative to economic growth as the taxes that they replace were. Therefore, it is possible to tax pollution and only minorly slow or even stimulate the economy.
This study examines the effect of various tax shifting scenarios in which the State of Minnesota would tax carbon emissions and return the taxes to taxpayers in the form of tax reductions. Thus, there is no total increase in taxes in the state. The study also assumes that the taxes will be neutral with respect to fundamental economic groupings; that is, the amount of taxes collected from the business sector will be returned to the business sector (although not necessarily to the same business) and all taxes paid by consumers will be returned to consumers (although not necessarily the same consumers).
The study considers the effect of a tax cut on the sources and use of energy in the state and on the economy of the state. For purposes of this study, all emissions made for Minnesota's direct benefit, such as power plants located out of the state which are run to generate electricity for the state, are counted as Minnesota emissions and are taxed accordingly. In studying pollution, this study looks at emissions only; it does not examine the absorption of the emissions or the effect of emissions made by other states on Minnesota's air quality. Four different tax scenarios were studied of which two are discussed here.
1) A tax set to $50 per ton of carbon. All of the carbon taxes paid by businesses will be returned to them via a reduction in their property taxes. All of the carbon taxes paid by consumers will be returned to them via a reduction in their property taxes. In some of the tables, this may also be referred to as Scenario 1.
2.)A tax set to $50 per ton of carbon. All of the carbon taxes paid by businesses will be returned to them via reduced employee taxes. All of the carbon taxes paid by consumers will be returned to them via Earned Income Tax (EIT) credits or reduced Social Security payments. In some of the Tables, this may be referred to as Scenario 2 (Table 1).
The results will be discussed in more detail in the later sections. However, it is worth noting that the desirability of one program over the other will depend upon one's perceptions of the key goals. Scenario 2 provides the largest Gross State Product and highest number of jobs but the reference case provides for the highest GSP per capita. Scenario 1 provides for the greatest reduction in carbon emissions and also in total energy use.
This study is organized as follows: Section I discusses the methods, tools, and assumptions of the analysis. Section II discusses the reference or base) case. Section III discusses the way the individual scenarios were modeled and the resulting output of the model for each scenario. Section IV contains a brief summary of the results.
The study uses two forecasting models: the Regional Economic Models Incorporated (REMI) model and the ENERGY 2020 model of energy use in Minnesota. These models are designed to work together and represent the interactions of energy policy, energy prices, and the various sectors of the economy.
The REMI model belongs to a class of models which are called "Computable General Equilibrium" (CGE) models the basic plants, both historically and how these plants might be built in the future, given costs and demands. Energy 2020 starts with an estimate of the amount of energy use associated with an activity or with income. …