Working Paper: CEPR ID: DP17915
Authors: Luigi Iovino; Thorsten Martin; Julien Sauvagnat
Abstract: We study the relationship between corporate taxation and carbon emissions in the U.S. We show that dirty firms pay lower profit taxes. This relationship is driven by dirty firms benefiting disproportionately more from the tax shield of debt due to their higher leverage. In addition, we document that the higher leverage of dirty firms is fully accounted for by the larger share of tangible assets owned by such firms. We build a general-equilibrium multi-sector economy and show that a revenue-neutral increase in profit taxation could lead to large decreases in aggregate carbon emissions without any noticeable change in GDP.
Keywords: leverage; carbon emissions; corporate taxes
JEL Codes: H32; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dirty firms (G33) | lower profit taxes (H29) |
| higher leverage of dirty firms (G32) | lower effective tax rates (H29) |
| higher leverage of dirty firms (G32) | larger share of tangible assets (G32) |
| 1 tonne of carbon emissions (Q54) | approximately 5 USD lower taxes (H29) |
| removal of tax advantage of debt (H26) | reallocation of economic activity from dirty to clean sectors (Q52) |
| reallocation of economic activity from dirty to clean sectors (Q52) | significant reductions in aggregate emissions (Q52) |
| negative relationship between carbon intensity and profit taxes (F64) | differences in tax shield of debt (G32) |
| clean firms (Q52) | do not benefit from tax deductions (H20) |