Working Paper: NBER ID: w16486
Authors: Ian W. H. Parry; Roberton C. Williams III
Abstract: This paper develops an analytical model to quantify the costs and distributional effects of various fiscal options for allocating the (large) rents created under prospective cap-and-trade programs to reduce domestic, energy-related CO2 emissions. The trade-off between cost effectiveness and distribution is striking. \n \nThe welfare costs of different policies, accounting for linkages with the broader fiscal system, range from negative $6 billion/year to $53 billion/year in 2020, or between minus $12 to almost $100 per ton of CO2 reductions! The least costly policy involves auctioning all allowances with revenues used to cut proportional income taxes, while the most costly policies involve recycling revenues in lump-sum dividends or grandfathering emissions allowances. The least costly policy is regressive, however, while the dividend policy is progressive, and grandfathering permits is both costly and regressive. A distribution-neutral policy entails costs of $18 to $42 per ton of CO2 reductions.
Keywords: climate policy; cap-and-trade; distributional effects; CO2 emissions; fiscal policy
JEL Codes: H22; H23; Q48; Q54; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| auctioning all allowances (D44) | lower welfare costs (I38) |
| lump-sum dividends (G35) | higher welfare costs (I39) |
| grandfathering emissions allowances (Q52) | higher welfare costs (I39) |
| auctioning (D44) | avoids overcompensation issues (M52) |
| auctioning is cost-effective (D44) | regressive burden on lower-income households (H22) |
| dividend policy is progressive (G35) | higher costs (J32) |
| distribution-neutral policy (D39) | balance net burdens (H22) |