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 at the six-digit North American Industry Classification System level. Providing an output-based tax credit to EITE sectors or a broad based reduction in corporate income tax rates disproportionately benefits EITE sectors thereby potentially reducing pressure for other transitional relief. Payroll tax reductions, on the other hand, do not disproportionately benefit EITE sectors given their higher than average capital intensity.

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