Nuremberg Research Seminar in Economics on 10 July 2024, LG 0.423

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You are invited to join the weekly Nuremberg Research Seminar in Economics on 10 July 2024, from 13.15 to 14.45 pm. The seminar will be held in room LG 0.423Oliver Schenker (ZEW Mannheim) will be talking about „The Optimal Design of Climate Policy in the Presence of Capital Tax Competition”.

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In the European Union, climate policies are largely harmonized, while capital taxation is under the jurisdiction of each member state. In a setting that closely resembles the policy architecture in the EU, we analyze how a benevolent supranational authority should optimally design a permit trading system, given that countries use capital taxes to finance local public goods and influence the allocation of capital and permits. We find that public goods can be provided at inefficiently high or low levels, depending, among other factors, on whether a country imports or exports capital. In a symmetric equilibrium, all countries provide too little of the public good. We find that, given the tax competition incentives of governments, the supranational authority should either grandfather or auction all permits. Under grandfathering, there is no rationale to deviate from the first-best rule relating to the emissions cap. Under auctioning, however, the cap should be adjusted either upwards or downwards, depending on whether tax rates are strategic substitutes or complements and whether countries provide too little or too much of the public good.