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Industry Compensation and the Costs of Alternative Environmental Policy Instruments

Author

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

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. Using analytically and numerically solved equilibrium models, we compare the incidence and economy-wide 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 lump-sum industry tax credits or industry-specific cuts in capital tax rates. We decompose the added costs from the compensation requirement into (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 and thus can alter the cost-rankings of policies. When compensation is provided through tax credits, the lump-sum compensation cost is higher under the emissions tax than under performance standards and mandated technologies -- a reflection of the emission tax's higher compensation requirements. If in this setting the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to become more costly than command and control policies. In contrast, if required abatement is extensive, the emissions tax emerges as the most cost-effective policy because its relatively low intrinsic abatement costs assume greater importance.

Suggested Citation

  • A. Lans Bovenberg & Lawrence H. Goulder & Mark R. Jacobsen, 2007. "Industry Compensation and the Costs of Alternative Environmental Policy Instruments," NBER Working Papers 13331, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13331
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    References listed on IDEAS

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    1. Lawrence H. Goulder & Ian W.H. Parry & Roberton C. Williams III & Dallas Burtraw, 2002. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 27, pages 523-554, Edward Elgar Publishing.
    2. Don Fullerton & Garth Heutel, 2010. "The General Equilibrium Incidence of Environmental Mandates," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 64-89, August.
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    4. Don Fullerton & Gilbert E. Metcalf, 2002. "Environmental Controls, Scarcity Rents, and Pre-existing Distortions," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 26, pages 504-522, Edward Elgar Publishing.
    5. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
    6. 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.
    7. Ian W.H. Parry & Wallace E. Oates & Ian W.H. Parry & Wallace E. Oates, 2004. "Policy Analysis in the Presence of Distorting Taxes," Chapters, in: Environmental Policy and Fiscal Federalism, chapter 4, pages 67-77, Edward Elgar Publishing.
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    10. A. Lans Bovenberg & Lawrence H. Goulder, 2001. "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 45-90, National Bureau of Economic Research, Inc.
    11. 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.
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    More about this item

    JEL classification:

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

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