Environmental taxation for environmental regulation and fiscal policy: An analysis of a Clinton-type BTU tax

This paper provides an empirical study of energy taxes for achieving environmental and fiscal policy objectives. Based on an energy tax structured like Clinton's 1993 BTU tax proposal, we demonstrate that the optimal tax will be higher the greater the environmental costs associated with energy consumption and the larger the economic distortions associated with alternative revenue-raising policies. Greater environmental damages and higher revenue-raising costs also have a fiscal policy implication; they shift the least-cost tax mix for raising additional revenue toward energy taxes and away from conventional tax alternatives.The authors wish to acknowledge the assistance of two anonymous referees, who provided very helpful feedback. We also wish to acknowledge outstanding research assistance from Tracy Terry of the School of Public and Environmental Affairs, Indiana University Bloomington. Of course, the results and conclusions of the paper are the authors' exclusively.