The marginal cost of funds in the presence of environmental externalities

The marginal cost of funds (MCF) is useful for measuring the cost of taxation in cost-benefit and tax reform analysis. In this paper we present general equilibrium estimates of the MCF in an economy with environmental externalities. We find that excluding such effects can yield quite misleading results. The inclusion of externalities opens up a significantly larger potential for tax reform, and the ranking of taxes is strikingly changed. The estimate of the average, base-case MCF is reduced. We also indicate double dividends in the Norwegian economy.