“Using the Tax System to Address Competition Issues with a Carbon Tax”Abstract:This paper considers how tax reductions financed by a carbon tax could be designed to mitigate the need for specific relief for firms in select energy-intensive, trade-exposed (EITE) sectors. In particular, I consider impacts on manufacturing sectors at the six-digit North American Industry Classification System level, with a special focus on firms that would be presumptively eligible for competitiveness relief using the criteria in the Waxman–Markey bill (H.R. 2454). The paper has a number of findings. First, determination of eligibility for relief analogous to the free allowance allocation in H.R. 2454 is sensitive to energy intensity. Second, providing compensation to EITE sectors through the corporate income tax—analogous to the output-based allowance allocation in Waxman–Markey—is certainly feasible, but tax appetite within the EITE sectors is insufficient to fully use any credits that attempted to offset more than about one-quarter of their carbon tax liability. Third, certain reforms do better than others at providing disproportionate relief to EITE sectors. Finally, economic theory predicts a substantial cost to diverting carbon tax revenue toward compensation of specific sectors. Theory also suggests that firms should treat policy risk no differently from the way they treat the other risks they face as they do business. But politics may dictate otherwise; if so, the analysis here suggests that certain approaches may work better than others to ensure that relief is appropriately targeted at minimal cost.http://rff.org/Publications/Pages/PublicationDetails.aspx?PublicationID=22284About the Speaker:Gilbert E. Metcalf is a Professor of Economics at Tufts University and a Research Associate at the National Bureau of Economic Research and MIT’s Joint Program on the Science and Policy of Global Change. Metcalf has taught at Princeton University, the Kennedy School of Government, and MIT. He has frequently testified before Congress, served on expert panels including a recent National Academies of Sciences panel on energy externalities, and served as a consultant to various organizations. During 2011 and 2012, he served as the Deputy Assistant Secretary for Environment and Energy at the U.S. Department of Treasury.Metcalf’s primary research area is applied public finance with particular interests in taxation, energy, and environmental economics. His current research focuses on policy evaluation and design in the area of energy and climate change. He has published papers in numerous academic journals, has edited three books, and has contributed chapters to several books on energy and tax policy. Metcalf received a B.A. in Mathematics from Amherst College, an M.S. in Agricultural and Resource Economics from the University of Massachusetts Amherst, and a Ph.D. in Economics from Harvard University.For more information on Gib please see his webpage.