The Environmental Bias of Corporate Income Taxation

We study the relationship between corporate income taxation and carbon dioxide emissions in the U.S. We show that CO2-intensive firms benefit more from the tax advantage of debt, and pay lower income taxes on their capital income. Building on these new facts, we provide evidence that a cut in the corporate income tax rate leads 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 corporate tax reforms on aggregate emissions. A policy that eliminates the tax advantage of debt could reduce aggregate emissions without affecting GDP.