CARBON TAXES WITH EXEMPTIONS IN AN OPEN-ECONOMY - A GENERAL EQUILIBRIUM-ANALYSIS OF THE GERMAN TAX INITIATIVE

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. Our paper analyzes the welfare costs of exemptions in en vironmental policy together with the issue of unilateral carbon taxes in an open economy. Several countries within the EU have introduced or contemplated unilateral tares to reduce anthropogenic CO, emissions. Taxes which are unilaterally imposed in an open economy can have signi ficant impacts on production and employment of energy- and export-inte nsive industries. To save jobs by maintaining ''international competit iveness'' most CO? taxation schemes include exemptions for energy- and export-intensive industries as a compromise between environmental obj ectives and employment in these sectors. This paper shows that such co mpromises are costly: as the tax base narrows, the dead-weight loss in creases. Our calculations illustrate this point in the framework of a static general equilibrium model for West Germany calibrated to 1990 d ata. We evaluate the excess costs of exemptions as a means of saving j obs in specific industries relative to an alternative instrument, a un iform carbon tax cum wage subsidy which achieves an identical level of national emissions and employment at a fraction of the cost. (C) 1997 Academic Press.