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

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Listed:
  • Parry Ian W. H.

    () (Resources for the Future)

  • Williams Roberton C.

    () (University of Maryland, Resources for the Future, and NBER)

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 proposed 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 a positive $53 billion/year in 2020 (or from -$12 to almost $100 per ton of CO2 reductions). The least costly policy involves auctioning all allowances with revenues used to cut 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. Grandfathering permits is both costly and regressive. A distribution-neutral policy entails costs of $18 to $42 per ton.

Suggested Citation

  • Parry Ian W. H. & Williams Roberton C., 2010. "What are the Costs of Meeting Distributional Objectives for Climate Policy?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-35, December.
  • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:2:n:9
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    References listed on IDEAS

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    Cited by:

    1. Matthias Kalkuhl & Ottmar Edenhofer & Kai Lessmann, 2015. "The Role of Carbon Capture and Sequestration Policies for Climate Change Mitigation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 60(1), pages 55-80, January.
    2. Adam Rose & Dan Wei & Fynnwin Prager, 2012. "Distributional Impacts Of Greenhouse Gas Emissions Trading: Alternative Allocation And Recycling Strategies In California," Contemporary Economic Policy, Western Economic Association International, vol. 30(4), pages 603-617, October.
    3. repec:oup:renvpo:v:11:y:2017:i:1:p:138-155. is not listed on IDEAS
    4. van Ruijven, Bas J. & O’Neill, Brian C. & Chateau, Jean, 2015. "Methods for including income distribution in global CGE models for long-term climate change research," Energy Economics, Elsevier, vol. 51(C), pages 530-543.
    5. Ian Parry & Chandara Veung & Dirk Heine, 2015. "How Much Carbon Pricing Is In Countries’ Own Interests? The Critical Role Of Co-Benefits," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-26, November.
    6. 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.
    7. Jan Siegmeier & Linus Mattauch & Max Franks & David Klenert & Anselm Schultes & Ottmar Edenhofer, 2015. "A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare," Working Papers 2015.31, Fondazione Eni Enrico Mattei.
    8. Joshua Blonz & Dallas Burtraw & Margaret Walls, 2012. "Social safety nets and US climate policy costs," Climate Policy, Taylor & Francis Journals, vol. 12(4), pages 474-490, July.
    9. John Stranlund & Carlos Chávez, 2013. "Who should bear the administrative costs of an emissions tax?," Journal of Regulatory Economics, Springer, vol. 44(1), pages 53-79, August.
    10. Gordon, Hal & Burtraw, Dallas & Williams, Roberton, 2015. "A Microsimulation Model of the Distributional Impacts of Climate Policies," Discussion Papers dp-14-40, Resources For the Future.
    11. Roberton C. Williams III, 2016. "Environmental Taxation," NBER Working Papers 22303, National Bureau of Economic Research, Inc.
    12. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2013. "Renewable energy subsidies: Second-best policy or fatal aberration for mitigation?," Resource and Energy Economics, Elsevier, vol. 35(3), pages 217-234.
    13. Tscharaktschiew, Stefan, 2014. "Shedding light on the appropriateness of the (high) gasoline tax level in Germany," Economics of Transportation, Elsevier, vol. 3(3), pages 189-210.
    14. Cullenward, Danny & T. Wilkerson, Jordan & Wara, Michael & Weyant, John P., 2016. "Dynamically estimating the distributional impacts of U.S. climate policy with NEMS: A case study of the Climate Protection Act of 2013," Energy Economics, Elsevier, vol. 55(C), pages 303-318.
    15. 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.
    16. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 195-214, March.
    17. Ian Parry, 2015. "Carbon Tax Burdens on Low-Income Households: A Reason for Delaying Climate Policy?," CESifo Working Paper Series 5482, CESifo Group Munich.
    18. Jun E Rentschler & Nobuhiro Hosoe, 2017. "Illicit dealings: Fossil fuel subsidy reforms and the role of tax evasion and smuggling," GRIPS Discussion Papers 17-05, National Graduate Institute for Policy Studies.
    19. Fischer, Carolyn & Fox, Alan K., 2012. "Climate policy and fiscal constraints: Do tax interactions outweigh carbon leakage?," Energy Economics, Elsevier, vol. 34(S2), pages 218-227.
    20. Parry, Ian, 2015. "Designing Fiscal Policy to Address the External Costs of Energy," International Review of Environmental and Resource Economics, now publishers, vol. 8(1), pages 1-56, May.
    21. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2014. "The Initial Incidence of a Carbon Tax Across U.S. States," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(4), pages 807-830, December.
    22. 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.
    23. 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.

    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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