Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes
A politically realistic approach to environmental policy seems to require avoiding significant profit-losses in major pollution-related industries. The government can avoid such losses by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax. However, preventing profit-losses in this way involves an efficiency cost because it compels the government to forego especially efficient sources of revenue and to rely more heavily on ordinary, distortionary taxes. Using analytically and numerically solved equilibrium models, we analyze these efficiency costs. We find that when the required amount of abatement is small, the efficiency cost implied by the profits-constraint dwarfs the other efficiency costs of pollution-control. When the abatement requirement becomes more extensive, the cost of this constraint diminishes relative to the other efficiency costs. We also calculate and analyze the determinants of the gross compensation ratio' the share of pollution permits that must be freely allocated to prevent profit-losses in the targeted industries. Numerical simulations of sulfur dioxide pollution-control suggest that the Bush Administration's Clear Skies Initiative would exceed this ratio, freely allocating more permits than necessary to preserve profits.
|Date of creation:||Nov 2003|
|Date of revision:|
|Publication status:||published as A. Lans Bovenberg & Lawrence H. Goulder & Derek J. Gurney, 2005. "Efficiency Costs of Meeting Industry-Distributional Constraints Under Environmental Permits and Taxes," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 950-970, Winter.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
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.:
- Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999.
"The cost-effectiveness of alternative instruments for environmental protection in a second-best setting,"
Journal of Public Economics,
Elsevier, vol. 72(3), pages 329-360, June.
- Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
- Lawrence H. Goulder & Ian W. H. Parry & Roberton C. Williams III & Dallas Burtraw, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," NBER Working Papers 6464, National Bureau of Economic Research, Inc.
- Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002.
"The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances,"
The Electricity Journal,
Elsevier, vol. 15(5), pages 51-62, June.
- Burtraw, Dallas & Palmer, Karen & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," Discussion Papers dp-02-15-, Resources For the Future.
- Ian W.H. Parry & Wallace E. Oates, 2000. "Policy analysis in the presence of distorting taxes," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(4), pages 603-613.
- Robert S. Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2002.
"That Elusive Elasticity: A Long-Panel Approach To Estimating The Price Sensitivity Of Business Capital,"
10th International Conference on Panel Data, Berlin, July 5-6, 2002
B3-1, International Conferences on Panel Data.
- Robert Chirinko & Steven M. Fazzari & Andrew P. Meyer, 2002. "That Elusive Elasticity: A Long-panel Approach to Estimating the Price Sensitivity of Business Capital," Emory Economics 0202, Department of Economics, Emory University (Atlanta).
- Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
- Farrow, Scott, 1999. "The duality of taxes and tradable permits: A survey with applications in Central and Eastern Europe," Environment and Development Economics, Cambridge University Press, vol. 4(04), pages 519-535, October.
- Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(2), pages 157-183, August.
- Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10059. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.