ABSTRACT

We study the relationship between corporate taxation and carbon dioxide (CO2) emissions in the U.S. We show that CO2-intensive firms benefit more from the tax advantage of debt, and pay lower taxes on their capital income. Building on these new facts, we provide causal evidence that tax cuts lead to a larger expansion of clean firms. We develop a multi-sector general equilibrium model that accounts for our evidence and quantify the impact of tax reforms on aggregate emissions. A policy that eliminates the tax advantage of debt could significantly reduce aggregate emissions without affecting GDP.

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