Working Paper: NBER ID: w24033
Authors: Carolyn Fischer; William A. Pizer
Abstract: Choices in energy regulation, particularly whether and how to price externalities, can have widely different distributional consequences both across and within income groups. Traditional welfare theory focuses largely on effects across income groups; such “vertical equity” concerns can typically be addressed by a progressive redistribution of emissions revenues. In this paper, we review alternative economic perspectives that give rise to equity concerns within income groups, or “horizontal equity,” and suggest operational measures. We then apply those measures to a stylized model of pollution regulation in the electricity sector. In addition, we look for ways to present the information behind those measures directly to stakeholders. We show how horizontal equity concerns might overshadow efficiency concerns in this context.
Keywords: energy regulation; horizontal equity; distributional consequences; pigouvian pricing
JEL Codes: D61; D63; Q48; Q52; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cap-and-trade policy (Q58) | Greater horizontal redistribution than tradable performance standard (H23) |
| Cap-and-trade policy (Q58) | Lower welfare than tradable performance standard (D69) |
| Energy regulation (L51) | Household welfare outcomes (I31) |
| Energy regulation (L51) | Distributional consequences across income groups (D39) |
| Pigouvian pricing policies (H23) | Household-level costs and benefits (D19) |
| Pigouvian pricing policies (H23) | Horizontal equity impacts (I14) |