Options for Returning the Value of CO2 Emissions Allowances to Households
AbstractThis paper examines alternative ways that the value of CO2 emissions allowances created under cap-and-trade policy could be returned to households. One approach (based on principles of economic efficiency) is effectively a “tax shift” that would use revenues from an auction of CO2 emissions allowances to reduce preexisting distortionary taxes. A second approach (based on principles of property rights for common-pool resources), known as cap-and-dividend, would refund allowance value as equal lump-sum cash transfers to households. Economic theory suggests (with some caveats) that a tax shift would be considerably less costly to the overall economy. In contrast, cap-and-dividend provides ample compensation for low-income households, though it appears to be more costly than other approaches, including perhaps well-designed regulatory policies. A dividend approach might be combined with other policies to provide incentives for households to invest in energy-efficient technologies and thereby lower the costs of the carbon policy.
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Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-11-03.
Date of creation: 22 Feb 2011
Date of revision:
cap-and-trade; auction tax shift; revenue recycling; tax interaction; dividends;
Find related papers by JEL classification:
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-05 (All new papers)
- NEP-ENE-2011-03-05 (Energy Economics)
- NEP-ENV-2011-03-05 (Environmental Economics)
- NEP-REG-2011-03-05 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Parry, Ian W. H. & Bento, Antonio M., 2000.
"Tax Deductions, Environmental Policy, and the "Double Dividend" Hypothesis,"
Journal of Environmental Economics and Management,
Elsevier, vol. 39(1), pages 67-96, January.
- Parry, Ian & Bento, Antonio, 1999. "Tax deductions, environmental policy, and the"double dividend"hypothesis," Policy Research Working Paper Series 2119, The World Bank.
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