Efficiency and distribution effects of resource and energy taxes for climate protection

Effective climate protection may substantially re-distribute rents around the globe. Economic sectors with market power will react strategically on mitigation policies. At stakes is the efficiency of instruments, but also their distributional effects, being a matter of global justice and of political implementability. Established analysis shows that optimal emission taxes may differ from Pigouvian taxes, such that input or output taxes should be preferred over emission charges. However, this leaves it open whether output or input taxes perform better. We determine the efficiency and the incidence on functional income distribution for input and output taxes (or tariffs) in the energy sector, based on a game theoretic growth model with explicit factor markets and policy instruments. It considers intertemporal interactions of different sectors including energy production and fossil fuel extraction. Market equilibrium depends on politics that act as a Stackelberg leader with a climate protection goal. We find that resource taxes and an alternative quantity instrument achieve this objective efficiently. Energy taxation is only second best. Labour and capital incomes take the main burden of this distortion. Its volume depends on the substitutability of fossil fuels. The quantity instrument generates substantial rents in the resource sector at the expense of transfer incomes.