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Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?

Author

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  • Parry, Ian W.H.

    (Resources for the Future)

  • Williams, Roberton C.

    (Resources for the Future)

Abstract

This paper estimates the welfare costs of the main medium-term options for significantly reducing U.S. energy-related carbon dioxide (CO2) emissions, including carbon taxes and cap-and-trade systems applied economy-wide and to the power sector only, and an emissions rate standard for power generation. The key theme is that welfare costs depend importantly on how policies interact with distortions in the economy created by the broader fiscal system. If allowance rent is not used to increase economic efficiency, economy-wide cap-and-trade systems perform the worst on cost-effectiveness grounds. In contrast, if revenues are used to substitute for distortionary income taxes (either directly, or indirectly through deficit reduction), economy-wide carbon taxes (or auctioned allowance systems) may have (slightly) negative costs. The bottom line is that revenues or rents created under economy-wide, market-based carbon policies must be used to increase economic efficiency to ensure that these instruments are more cost-effective than regulatory or sectoral approaches.

Suggested Citation

  • Parry, Ian W.H. & Williams, Roberton C., 2011. "Moving U.S. Climate Policy Forward: Are Carbon Taxes the Only Good Alternative?," RFF Working Paper Series dp-11-02, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-11-02
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    File URL: http://www.rff.org/RFF/documents/RFF-DP-11-02.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Epanchin-Niell, Rebecca S. & Wilen, James E., 2010. "Optimal control of spatial-dynamic processes: The case of biological invasions," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61375, Agricultural and Applied Economics Association.
    2. Parry, Ian W.H., 2012. "Reforming the tax system to promote environmental objectives: An application to Mauritius," Ecological Economics, Elsevier, vol. 77(C), pages 103-112.
    3. Ian Parry, 2013. "Fiscal instruments for climate finance," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 16, pages 377-402, Edward Elgar Publishing.
    4. Becker, Jonathon M., 2023. "Tradable performance standards in a dynamic context," Resource and Energy Economics, Elsevier, vol. 73(C).
    5. Derek Lemoine, 2017. "Escape from Third-Best: Rating Emissions for Intensity Standards," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(4), pages 789-821, August.
    6. Warwick J. Mckibbin & Adele C. Morris & Peter J. Wilcoxen & Weifeng Liu, 2018. "The Role Of Border Carbon Adjustments In A U.S. Carbon Tax," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-41, February.
    7. Paul, Anthony & Palmer, Karen & Woerman, Matt, 2013. "Modeling a clean energy standard for electricity: Policy design implications for emissions, supply, prices, and regions," Energy Economics, Elsevier, vol. 36(C), pages 108-124.
    8. Brennan, Timothy J. & Macauley, Molly & Whitefoot, Kate, 2011. "Prizes, Patents, and Technology Procurement: A Proposed Analytical Framework," RFF Working Paper Series dp-11-21-rev, Resources for the Future.
    9. repec:clg:wpaper:2014-01 is not listed on IDEAS
    10. Ian Parry & Victor Mylonas & Nate Vernon, 2021. "Mitigation Policies for the Paris Agreement: An Assessment for G20 Countries," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(4), pages 797-823.
    11. Alberto Gago & Xavier Labandeira & Xiral López Otero, 2014. "A Panorama on Energy Taxes and Green Tax Reforms," Hacienda Pública Española / Review of Public Economics, IEF, vol. 208(1), pages 145-190, March.
    12. Tombe, Trevor & Winter, Jennifer, 2015. "Environmental policy and misallocation: The productivity effect of intensity standards," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 137-163.
    13. William G. Gale & Samuel Brown, 2013. "Tax Reform for Growth, Equity, and Revenue," Public Finance Review, , vol. 41(6), pages 721-754, November.
    14. Mathur, Aparna & Morris, Adele C., 2014. "Distributional effects of a carbon tax in broader U.S. fiscal reform," Energy Policy, Elsevier, vol. 66(C), pages 326-334.
    15. Paul, Anthony & Palmer, Karen & Woerman, Matt, 2014. "Analysis of the Bingaman clean energy standard proposal," Resource and Energy Economics, Elsevier, vol. 36(1), pages 113-129.
    16. Paula Pereda & Andrea Lucchesi, Carolina Policarpo Garcia, Bruno Toni Palialol, 2019. "Neutral carbon tax and environmental targets in Brazil," Working Papers, Department of Economics 2019_02, University of São Paulo (FEA-USP).
    17. Rausch, Sebastian & Mowers, Matthew, 2014. "Distributional and efficiency impacts of clean and renewable energy standards for electricity," Resource and Energy Economics, Elsevier, vol. 36(2), pages 556-585.
    18. Nicoletta Batini & Ian W.H. Parry & Mr. Philippe Wingender, 2020. "Climate Mitigation Policy in Denmark: A Prototype for Other Countries," IMF Working Papers 2020/235, International Monetary Fund.
    19. David C. Warren & Zachary A. Wendling & Jacob Bower-Bir & Henry Fields & Kenneth R. Richards & Sanya Carley & Barry M. Rubin, 2015. "Estimating state and sub-state economic effects of a carbon dioxide tax policy: An application of a new multi-region energy-economy econometric model," Regional Science Policy & Practice, Wiley Blackwell, vol. 7(3), pages 119-139, August.

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    More about this item

    Keywords

    carbon tax; cap-and-trade; cost-effectiveness; distortionary taxes; revenue recycling;
    All these keywords.

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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