IDEAS home Printed from https://ideas.repec.org/p/tiu/tiucen/b15fd965-9cdc-41d3-a4e9-df6445009839.html
   My bibliography  Save this paper

Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes

Author

Listed:
  • Bovenberg, A.L.

    (Tilburg University, Center For Economic Research)

  • Goulder, L.H.
  • Gurney, D.J.

Abstract

Many pollution-related industries wield strong political influence and can e.ectively veto policy initiatives that would harm their profits.A politically realistic approach to environmental policy therefore seems to require the alleviation of significant profitlosses to these industries.The regulatory authority can do this by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax.However, such policies compel the government to forego an e.cient potential revenue source and to rely more heavily on ordinary distortionary taxes.As a result, achieving distributional objectives comes at a cost in terms of e.ciency.Using analytically and numerically solved equilibrium models, we analyze the e.- ciency costs implied by the distributional constraint that adverse impacts on profits in particular industries must be avoided.Both models indicate that the e.ciency cost implied by this constraint dwarfs the other e.ciency costs when the required amount of abatement is very small.When the abatement requirement becomes more extensive, however, the cost of this constraint diminishes relative to the other e.ciency costs of pollution-control.We also calculate the compensation ratio: the share of potential policy revenue that the government must forego to protect the industries in question.We show how this ratio is a.ected by the extent of abatement, supply and demand elasticities, and the potential for end-of-pipe treatment.One definition of this ratio corresponds to 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.Our models also highlight significant di.erences between gross and net policy revenues: when abatement is extensive, a large fraction of the revenue collected from emissions permits or taxes is o.set by the revenue-loss from erosion of the base of existing factor taxes.

Suggested Citation

  • Bovenberg, A.L. & Goulder, L.H. & Gurney, D.J., 2003. "Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes," Discussion Paper 2003-86, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:b15fd965-9cdc-41d3-a4e9-df6445009839
    as

    Download full text from publisher

    File URL: https://pure.uvt.nl/ws/portalfiles/portal/598451/86.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 64-77, November.
    3. 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.
    4. Spencer Banzhaf, H. & Burtraw, Dallas & Palmer, Karen, 2004. "Efficient emission fees in the US electricity sector," Resource and Energy Economics, Elsevier, vol. 26(3), pages 317-341, September.
    5. Burtraw, Dallas & Palmer, Karen L. & Bharvirkar, Ranjit & Paul, Anthony, 2002. "The Effect on Asset Values of the Allocation of Carbon Dioxide Emission Allowances," Discussion Papers 10705, Resources for the Future.
    6. 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).
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    efficiency; costs; environmental tax; pollution; environmental policy;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tiu:tiucen:b15fd965-9cdc-41d3-a4e9-df6445009839. 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: (Richard Broekman). General contact details of provider: http://center.uvt.nl .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.