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What Are the Costs of Meeting Distributional Objectives for Climate Policy?

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  • Ian W.H. Parry
  • Roberton C. Williams III

Abstract

This paper develops an analytical model to quantify the costs and distributional effects of various fiscal options for allocating the (large) rents created under prospective cap-and-trade programs to reduce domestic, energy-related CO2 emissions. The trade-off between cost effectiveness and distribution is striking. The welfare costs of different policies, accounting for linkages with the broader fiscal system, range from negative $6 billion/year to $53 billion/year in 2020, or between minus $12 to almost $100 per ton of CO2 reductions! The least costly policy involves auctioning all allowances with revenues used to cut proportional income taxes, while the most costly policies involve recycling revenues in lump-sum dividends or grandfathering emissions allowances. The least costly policy is regressive, however, while the dividend policy is progressive, and grandfathering permits is both costly and regressive. A distribution-neutral policy entails costs of $18 to $42 per ton of CO2 reductions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16486.

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Date of creation: Oct 2010
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Publication status: published as Ian W. H. Parry & Roberton C. Williams III, 2010. "What are the Costs of Meeting Distributional Objectives for Climate Policy?," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 10(2), pages 9.
Handle: RePEc:nbr:nberwo:16486

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  1. Aldy, Joseph E. & Krupnick, Alan J. & Newell, Richard G. & Parry, Ian W.H. & Pizer, William A., 2009. "Designing Climate Mitigation Policy," Discussion Papers dp-08-16, Resources For the Future.
  2. Parry, Ian & Bento, Antonio, 1999. "Tax deductions, environmental policy, and the"double dividend"hypothesis," Policy Research Working Paper Series 2119, The World Bank.
  3. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  4. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  5. Louis Kaplow, 2004. "On the (Ir)Relevance of Distribution and Labor Supply Distortion to Government Policy," Journal of Economic Perspectives, American Economic Association, vol. 18(4), pages 159-175, Fall.
  6. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
  7. Parry, Ian W. H., 2004. "Are emissions permits regressive?," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 364-387, March.
  8. Sijm, J. & Neuhoff, K. & Chen, Y., 2006. "CO2 cost pass through and windfall profits in the power sector," Cambridge Working Papers in Economics 0639, Faculty of Economics, University of Cambridge.
  9. Burtraw, Dallas & Sweeney, Richard & Walls, Margaret, 2009. "The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction," Discussion Papers dp-09-17-rev, Resources For the Future.
  10. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc.
  11. Kevin A. Hasset & Aparna Mathur & Gilbert Metcalf, 2007. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," Discussion Papers Series, Department of Economics, Tufts University 0714, Department of Economics, Tufts University.
  12. Corbett Grainger & Charles Kolstad, 2010. "Who Pays a Price on Carbon?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 46(3), pages 359-376, July.
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Cited by:
  1. John K. Stranlund & Carlos A. Chavez, 2011. "Who Should Bear the Administrative Costs of an Emissions Tax?," Working Papers 2011-3, University of Massachusetts Amherst, Department of Resource Economics.
  2. Lawrence H. Goulder, 2013. "Markets for Pollution Allowances: What Are the (New) Lessons?," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 87-102, Winter.
  3. Martin Beznoska & Johanna Cludius & Viktor Steiner, 2012. "The Incidence of the European Union Emissions Trading System and the Role of Revenue Recycling: Empirical Evidence from Combined Industry- and Household-Level Data," Discussion Papers of DIW Berlin 1227, DIW Berlin, German Institute for Economic Research.
  4. Matthias Kalkuhl & Ottmar Edenhofer & Kai Lessmann, 2011. "Renewable Energy Subsidies: Second-Best Policy or Fatal Aberration for Mitigation?," Working Papers 2011.48, Fondazione Eni Enrico Mattei.
  5. Cludius, Johanna & Beznoska, Martin & Steiner, Viktor, 2012. "Distributional effects of the European Emissions Trading System and the role of revenue recycling: Empirical evidence from combined industry- and household-level data," Discussion Papers 2012/6, Free University Berlin, School of Business & Economics.
  6. Fischer, Carolyn & Fox, Alan K., 2012. "Climate policy and fiscal constraints: Do tax interactions outweigh carbon leakage?," Energy Economics, Elsevier, vol. 34(S2), pages S218-S227.
  7. Matthias Kalkuhl & Ottmar Edenhofer & Kai Lessmann, 2012. "The Role of Carbon Capture and Sequestration Policies for Climate Change Mitigation," CESifo Working Paper Series 3834, CESifo Group Munich.
  8. Parry, Ian W.H. & Williams, Roberton C., 2011. "Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?," Discussion Papers dp-11-02, Resources For the Future.

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