Costs of alternative environmental policy instruments in the presence of industry compensation requirements
Bovenberg,A.L. Goulder,L.H. Jacobsen,M.R.
Bovenberg,A.L.
Goulder,L.H.
Jacobsen,M.R.
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. We apply a numerically solved general equilibrium model to compare the incidence and 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 industry tax credits or industry-specific cuts in capital tax rates. We analyze the added costs from the compensation requirement in terms of (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, depending on the policy instrument involved and the required extent of pollution abatement. As a result, it can change the cost rankings of the different instruments. In particular, when compensation is provided through lump-sum tax credits, the lump-sum compensation cost is higher under the emissions tax than under the command-and-control policies (performance standards and mandated technologies) — a reflection of the higher compensation requirements under the emissions tax. When the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to lose its status as the least costly instrument and to become more costly than command-and-control policies. In contrast, when required abatement is extensive, the emissions tax again becomes the most cost-effective instrument because of its advantages in terms of lower intrinsic abatement cost.
Description
Appeared earlier as CentER DP 2006-127
Date
2008
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
SDG 9 - Industry, Innovation, and Infrastructure, SDG 13 - Climate Action, SDG 15 - Life on Land
Citation
Bovenberg, A L, Goulder, L H & Jacobsen, M R 2008, 'Costs of alternative environmental policy instruments in the presence of industry compensation requirements', Journal of Public Economics, vol. 92, no. 5-6, pp. 1236-1253.