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Costs of Alternative Environmental Policy Instruments in the Presence of Industry Compensation Requirements

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  • Bovenberg, A.L.
  • Goulder, L.H.
  • Jacobson, M.R.

    (Tilburg University, Center for Economic Research)

Abstract

This paper explores how the costs of meeting given aggregate targets for pollution emissions change with the imposition of the requirement that key pollution-related industries be compensated for potential losses of profit from the pollution regulation.Using analytically and numerically solved equilibrium models, we compare the incidence and costs of emissions taxes, fuel (intermediate input) taxes, performance standards and mandated technologies in the absence and presence of this compensation requirement.Compensation is provided either through industry tax credits or industry-specific cuts in capital tax rates.We decompose the added costs from the compensation requirement into (1) an increase in "intrinsic abatement cost," reflecting a lowered efficiency of pollution abatement, and (2) a "lump-sum compensation cost" that captures the efficiency costs of financing the compensation.The compensation requirement affects these components differently, depending on the policy instrument involved and the required extent of pollution abatement.As a result, it can change the cost-rankings of the different instruments.In particular, when compensation is provided through tax credits, the lump-sum compensation cost is higher under the emissions tax than under the command-andcontrol policies (performance standards and mandated technologies) - a reflection of the higher compensation requirements under the emissions tax.When the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to lose its status as the least costly instrument and to become more costly than command and control policies.In contrast, when required abatement is extensive, the emissions tax again becomes the most-cost effective instrument because of its advantages in terms of lower intrinsic abatement cost.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2006-127.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:2006127

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Web page: http://center.uvt.nl

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Keywords: environmental instrument choice; pollution control; compensation requirements; emissions abatement costs;

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  1. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
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Citations

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Cited by:
  1. Bard Harstad & Gunnar S. Eskeland, 2006. "Trading for the Future: Signaling in Permit Markets," Discussion Papers 1429, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Ralf Martin & Mirabelle Muûls & Laure B. de Preux & Ulrich J. Wagner, 2012. "Industry compensation under relocation risk: a firm-level analysis of the EU Emissions Trading Scheme," Grantham Research Institute on Climate Change and the Environment Working Papers 85, Grantham Research Institute on Climate Change and the Environment.
  3. Kiuila, O. & Rutherford, T.F., 2013. "The cost of reducing CO2 emissions: Integrating abatement technologies into economic modeling," Ecological Economics, Elsevier, vol. 87(C), pages 62-71.
  4. Iain Fraser & Robert Waschik, 2010. "The Double Dividend Hypothesis in a CGE Model: Specific Factors and Variable Labour Supply," Working Papers 2010.02, School of Economics, La Trobe University.
  5. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer, vol. 20(1), pages 29-70, February.
  6. Fraser, Iain & Waschik, Robert, 2013. "The Double Dividend hypothesis in a CGE model: Specific factors and the carbon base," Energy Economics, Elsevier, vol. 39(C), pages 283-295.
  7. Stephen P. Holland, 2009. "Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power," NBER Working Papers 15262, National Bureau of Economic Research, Inc.
  8. Paul Ekins & Stefan Speck, 2014. "The fiscal implications of climate change and policy responses," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 19(3), pages 355-374, March.
  9. Guy Meunier & Jean-Pierre Ponssard & Philippe Quirion, 2012. "Carbon Leakage and Capacity-Based Allocations. Is the EU right?," CESifo Working Paper Series 4029, CESifo Group Munich.
  10. van Benthem, Arthur & Kerr, Suzi, 2013. "Scale and transfers in international emissions offset programs," Journal of Public Economics, Elsevier, vol. 107(C), pages 31-46.
  11. Lange, Ian & Polborn, Sarah, 2012. "Can lobbying encourage abatement? Designing a new policy instrument," Stirling Economics Discussion Papers 2012-03, University of Stirling, Division of Economics.
  12. Freebairn, John W., 2011. "A Tax Mix Change to Reduce Greenhouse Gas Emissions," 2011 Conference (55th), February 8-11, 2011, Melbourne, Australia 100551, Australian Agricultural and Resource Economics Society.
  13. Schmidt, Robert C. & Heitzig, Jobst, 2014. "Carbon leakage: Grandfathering as an incentive device to avert firm relocation," Journal of Environmental Economics and Management, Elsevier, vol. 67(2), pages 209-223.
  14. Sriniketh Nagavarapu, 2008. "Brazilian Ethanol: A Gift or Threat to the Environment and Regional Development?," Discussion Papers 07-039, Stanford Institute for Economic Policy Research.

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