Working Paper: NBER ID: w13331
Authors: 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.
Keywords: Environmental Policy; Compensation; Emissions Taxes; Performance Standards; Economic Costs
JEL Codes: H21; H23; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Compensation requirements (M52) | costs of environmental policy instruments (Q58) |
| Compensation through tax credits (H23) | lumpsum compensation cost under emissions taxes > performance standards and mandated technologies (Q52) |
| High required pollution reduction (Q52) | higher overall costs under emissions taxes (H23) |
| Extensive required abatement (Q52) | emissions taxes become most cost-effective policy (Q58) |
| Introduction of profit-loss constraint (D20) | alters cost rankings of emissions taxes and command-and-control policies (Q58) |
| Lower levels of required abatement (Q52) | emissions tax becomes more costly than command-and-control policies (Q58) |
| Compensation through reductions in capital tax rates (H29) | raises intrinsic abatement cost (Q52) |
| Compensation through reductions in capital tax rates (H29) | affects efficiency of pollution abatement (Q52) |