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Subsidizing Household Capital: How Does Energy Efficiency Policy Compare to a Carbon Tax?

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  • Warwick J. McKibbin, Adele C. Morris, and Peter J. Wilcoxen

Abstract

This study uses a general equilibrium model to compare environmental and economic outcomes of two policies: (1) a tax credit of 10 percent of the price of household capital that is 20 percent more energy efficient than its unsubsidized counterpart, assuming half of new household investment qualifies for the credit; and (2) a tax starting at $30 ($2007) per metric ton of CO2 rising five percent annually. By 2040, the carbon tax and tax credit reduce emissions by about 60 1.5 percent, respectively. Assuming other countries impose no carbon price, we find that although the carbon tax reduces U.S. GDP, it improves U.S. household welfare because it reduces world fuel prices, strengthens U.S. terms of trade, and makes imports cheaper. The revenue neutral tax credit reduces welfare but boosts U.S. GDP growth slightly at first. Both policies have similar impacts on the federal budget, but of opposite signs. doi: 10.5547/ISSN0195-6574-EJ-Vol32-SI1-7
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  • Warwick J. McKibbin, Adele C. Morris, and Peter J. Wilcoxen, 2011. "Subsidizing Household Capital: How Does Energy Efficiency Policy Compare to a Carbon Tax?," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    • Handle: RePEc:aen:journl:32si1-a07
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    1. Warwick J. McKibbin & Martin T. Ross & Robert Shackleton & Peter J. Wilcoxen, 1999. "Emissions Trading, Capital Flows and the Kyoto Protocol," The Energy Journal, , vol. 20(1_suppl), pages 287-333, June.
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    Cited by:

    1. Nie, Pu-Yan & Wang, Chan & Yang, Yon-Cong, 2017. "Comparison of energy efficiency subsidies under market power," Energy Policy, Elsevier, vol. 110(C), pages 144-149.
    2. Bye, Brita & Fæhn, Taran & Rosnes, Orvika, 2018. "Residential energy efficiency policies: Costs, emissions and rebound effects," Energy, Elsevier, vol. 143(C), pages 191-201.
    3. Nie, Pu-yan & Yang, Yong-cong & Chen, You-hua & Wang, Zhao-hui, 2016. "How to subsidize energy efficiency under duopoly efficiently?," Applied Energy, Elsevier, vol. 175(C), pages 31-39.
    4. Alberto Gago & Michael Hanemann & Xavier Labandeira & Ana Ramos, 2013. "Climate change, buildings and energy prices," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 19, pages 434-452, Edward Elgar Publishing.
    5. Morris, Adele C. & Nivola, Pietro S. & Schultze, Charles L., 2012. "Clean energy: Revisiting the challenges of industrial policy," Energy Economics, Elsevier, vol. 34(S1), pages 34-42.
    6. Asafu-Adjaye, John & Mahadevan, Renuka, 2013. "Implications of CO2 reduction policies for a high carbon emitting economy," Energy Economics, Elsevier, vol. 38(C), pages 32-41.

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