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Costs of alternative environmental policy instruments in the presence of industry compensation requirements

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  • Bovenberg, A. Lans
  • Goulder, Lawrence H.
  • Jacobsen, Mark R.

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. We apply a numerically solved general equilibrium model to 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 analyze the added costs from the compensation requirement in terms of (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 lump-sum tax credits, the lump-sum compensation cost is higher under the emissions tax than under the command-and-control 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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  • Bovenberg, A. Lans & Goulder, Lawrence H. & Jacobsen, Mark R., 2008. "Costs of alternative environmental policy instruments in the presence of industry compensation requirements," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1236-1253, June.
  • Handle: RePEc:eee:pubeco:v:92:y:2008:i:5-6:p:1236-1253
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    Cited by:

    1. 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.
    2. Pereira, Alfredo & Pereira, Rui, 2016. "On the Optimal Use of Revenues from a CO2 Tax and the Importance of Labor Market Conditions," MPRA Paper 77630, University Library of Munich, Germany.
    3. 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.
    4. Meunier, Guy & Ponssard, Jean-Pierre & Quirion, Philippe, 2014. "Carbon leakage and capacity-based allocations: Is the EU right?," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 262-279.
    5. 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.
    6. John Freebairn, 2012. "Tax mix change to reduce greenhouse gas emissions," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 56(1), pages 102-116, January.
    7. repec:gam:jecomi:v:6:y:2018:i:1:p:7-:d:129170 is not listed on IDEAS
    8. 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.
    9. Ralf Martin & Mirabelle Mu?ls & Laure B. de Preux & Ulrich J. Wagner, 2014. "Industry Compensation under Relocation Risk: A Firm-Level Analysis of the EU Emissions Trading Scheme," American Economic Review, American Economic Association, vol. 104(8), pages 2482-2508, August.
    10. Benjamin Jones & Michael Keen & Jon Strand, 2013. "Fiscal implications of climate change," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(1), pages 29-70, February.
    11. 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.
    12. Harstad, Bård & Eskeland, Gunnar S., 2010. "Trading for the future: Signaling in permit markets," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 749-760, October.
    13. repec:spr:chfecr:v:4:y:2016:i:1:d:10.1186_s40589-016-0040-0 is not listed on IDEAS
    14. 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.
    15. Holland, Stephen P., 2012. "Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 375-387.
    16. Ian A. Lange & Sarah Polborn, 2012. "Can Lobbying Encourage Abatement? Designing a New Policy Instrument," CESifo Working Paper Series 3760, CESifo Group Munich.
    17. Jean Charles Hourcade & Michel Aglietta & B Perrissin-Fabert, 2014. "Transition to a Low-Carbon society and sustainable economic recovery, a monetary-based financial device," Post-Print hal-01692593, HAL.
    18. 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.
    19. MacKenzie, Ian A. & Ohndorf, Markus, 2012. "Cap-and-trade, taxes, and distributional conflict," Journal of Environmental Economics and Management, Elsevier, vol. 63(1), pages 51-65.
    20. Alfredo Marvão Pereira & Rui M. Pereira, 2015. "Achieving the Triple Dividend in Portugal: A Dynamic General-Equilibrium Evaluation of a Carbon Tax Indexed to Emissions Trading," Working Papers 155, Department of Economics, College of William and Mary.
    21. Yazid Dissou & Qian Sun, 2013. "GHG Mitigation Policies and Employment: A CGE Analysis with Wage Rigidity and Application to Canada," Canadian Public Policy, University of Toronto Press, vol. 39(s2), pages 53-66, August.
    22. 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.
    23. Bento, Antonio M. & Kanbur, Ravi & Leard, Benjamin, 2015. "Designing efficient markets for carbon offsets with distributional constraints," Journal of Environmental Economics and Management, Elsevier, vol. 70(C), pages 51-71.
    24. Wei-Bin Zhang, 2014. "Global Economic Growth and Environmental Change," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 64(3), pages 3-29, July-Sept.

    More about this item

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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