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Executive Summary

Burdens and Benefits of Environmental Tax Reform: An Analysis of Distribution by Industry

February 2000
By J. Andrew Hoerner

It should go without saying that great public policies are never great for everyone. Crafting laws that benefit the majority, and do the least amount of harm to the minority, should be, in most cases, the goal of a legislator. These political fundamentals must be kept in mind as we weigh the pros and cons of policies aimed at slowing or reversing global climate change.

A number of studies have examined the distribution of the burden of an energy tax on manufacturing industries or broad sectors of the economy. Many of those studies do not use energy tax revenues to reduce payroll taxes or corporate income taxes. "Burdens and Benefits of Environmental Tax Reform" by J. Andrew Hoerner provides a description of the net effect of an "environmental tax reform"--an energy tax with revenue recycling--on 498 categories of businesses tracked in the U.S. Bureau of Economic Analysis.

Hoerner's work is important because it will allow policymakers to anticipate more accurately which sectors will require transition assistance under an ETR. Moreover, the paper improves the possibility of designing an ETR policy that would help those sectors that need it most. Hoerner also discusses the use of Border Tax Adjustments, which have been used to prevent domestic policy from harming U.S. businesses in world and domestic markets.


Hoerner uses an input-output (IO) model to measure the distribution of costs and benefits across industries. The IO method accounts for both direct and indirect energy use by each industry. Indirect use is the energy that was used to make the physical inputs used by a subsequent business to make a good or deliver a service. IO models are useful for a first analysis of this type of distributional question, but they do not reflect any behavioral change as a result of the policy. So the analysis should be understood as the impacts immediately after a policy is adopted (or announced), but before businesses have a chance to reduce energy use.

The impact of this ETR policy on the overall U.S. competitive position is modest and may be positive--although energy and energy-intensive industries would still suffer.

Using data from the 1995 Bureau of Labor Statistics IO table, he first estimates the net tax burden from a $50/ton carbon tax. He then uses the revenue to reduce the payroll tax or the corporate income tax. . The net burden of the policy is estimated as being the percentage change in output price for each industry. The direct labor tax cuts for each industry is equal to the total labor tax cut (which in turn is equal to the revenue from the PET) times the labor share of that industry. The direct capital tax cuts for each industry is equal to the total capital tax cut times the capital share of that industry. Finally, the price changes are used to estimate the impact on each industry in international trade.


Hoerner estimates that a large majority of U.S. industry would benefit from ETR. Seventy-three to eighty percent of all industries by value of output, employing seventy-eight to ninety-two percent of U.S. workers, would be net beneficiaries. This pattern holds true regardless of the incidence assumption (e.g., whether a payroll tax cut would lower the before tax wage, benefiting employers, or increase the after tax wage, benefiting workers). At the same time, however, a small but important group of industries, mostly in mining and the production of bulk metals, chemicals, and ceramics, might suffer substantial price increases. The global competitiveness of these industries could be significantly harmed unless special policies were adopted to lessen their burden.

The impact of this ETR policy on the overall U.S. competitive position is modest and may be positive--although energy and energy-intensive industries would still suffer. Hoerner discusses Border Tax Adjustments (BTA) as a historically proven approach to improving international market concerns for the entire economy and for domestic industries that bear an especially large burden. BTAs improve the competitiveness of U.S. exports by removing the U.S. carbon tax paid on exported products. They also reduce the competitive advantage of emissions-intensive imports in U.S. markets by ensuring that they pay the same taxes as U.S. producers. Applying BTAs on roughly 20 to 40 of the 498 industries in Hoerner's model would assure that both the overall competitiveness of U.S. industry in world markets and the balance of trade would be improved by ETR. This conclusion holds true regardless of whether labor or capital taxes are lowered, and regardless of the incidence assumption.

Through this seminal analysis of the distribution of impact of an energy ETR on 498 sectors of the U.S. economy, Hoerner provides policy makers with information they need to address the political issues that arise when discussing climate policy impact on U.S. businesses. The study, like all economic models, is a simplification of reality. But it adds to our understanding in an important way that should help business and labor leaders to better understand that the likely burden on their particular line of work is probably small, and might well be positive.

Note: Executive Summary prepared by Brian Parkinson and Gary Wolff.

Download "Burdens and Benefits of Environmental Tax Reform" (59 pp. / 302 kb)