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Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures

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  • Rausch Sebastian

    ()
    (Massachusetts Institute of Technology)

  • Metcalf Gilbert E.

    ()
    (Tufts University)

  • Reilly John M

    ()
    (Massachusetts Institute of Technology)

  • Paltsev Sergey

    ()
    (Massachusetts Institute of Technology)

Abstract

We analyze the distributional and efficiency impacts of different allowance allocation schemes motivated by recently proposed U.S. climate legislation for a national cap and trade system using a new dynamic computable general equilibrium model of the U.S. economy. The USREP model tracks nine different income groups and twelve different geographic regions within the U.S. We find that the allocation schemes in all proposals are progressive over the lower half of the income distribution and proportional in the upper half of the income distribution. Scenarios based on the Cantwell-Collins allocation proposal are less progressive in early years and have lower welfare costs due to smaller redistribution to low income households and, consequently, lower income-induced increases in energy demand and less savings and investment. Scenarios based on the three other allocation schemes tend to overcompensate some adversely affected income groups and regions in early years, but this dissipates over time as the allowance allocation effect becomes weaker. Finally, we find that carbon pricing by itself (ignoring the return of carbon revenues through allowance allocations) is proportional to modestly progressive. This striking result follows from the dominance of the sources over uses side impacts of the policy and stands in sharp contrast to previous work that has focused only on the uses side. The main reason is that lower income households derive a large fraction of income from government transfers, and we hold the transfers constant in real terms, reflecting the fact that transfers are generally indexed to inflation. As a result, this source of income is unaffected by carbon pricing while wage and capital income is affected.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 2 (July)
Pages: 1-46

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:2:n:1

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  1. Parry, Ian, 2003. "Are Emissions Permits Regressive?," Discussion Papers dp-03-21, Resources For the Future.
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Cited by:
  1. Don Fullerton & Garth Heutel & Gilbert E. Metcalf, 2011. "Does the Indexing of Government Transfers Make Carbon Pricing Progressive?," NBER Working Papers 16768, National Bureau of Economic Research, Inc.
  2. Richard Tol, 2012. "Leviathan carbon taxes in the short run," Climatic Change, Springer, vol. 114(2), pages 409-415, September.
  3. Pollak, Melisa & Meyer, Bryn & Wilson, Elizabeth, 2011. "Reducing greenhouse gas emissions: Lessons from state climate action plans," Energy Policy, Elsevier, vol. 39(9), pages 5429-5439, September.
  4. Gilbert E. Metcalf & Aparna Mathur & Kevin A. Hassett, 2010. "Distributional Impacts in a Comprehensive Climate Policy Package," NBER Working Papers 16101, National Bureau of Economic Research, Inc.
  5. Buscemi, Antonino & Yallwe, Alem Hagos, 2011. "It is time to re-think on environment, energy and economics (E3)," MPRA Paper 30998, University Library of Munich, Germany.
  6. Rausch, Sebastian & Mowers, Matthew, 2014. "Distributional and efficiency impacts of clean and renewable energy standards for electricity," Resource and Energy Economics, Elsevier, vol. 36(2), pages 556-585.
  7. Fullerton, Don & Monti, Holly, 2013. "Can pollution tax rebates protect low-wage earners?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 539-553.
  8. Chen, Y.-H. Henry & Timilsina, Govinda R., 2012. "Economic implications of reducing carbon emissions from energy use and industrial processes in Brazil," Policy Research Working Paper Series 6135, The World Bank.

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