The B.E. Journal of Economic Analysis & Policy

Published by De Gruyter

Volume 10 Issue 2 - “Distributional Aspects of Energy and Climate Policy” edited by Don Fullerton

December 2010

Issue of The B.E. Journal of Economic Analysis & Policy

Contents
Journal Overview

Symposium

July 13, 2010

Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures

Sebastian Rausch, Gilbert E. Metcalf, John M Reilly, Sergey Paltsev

Abstract

We analyze the distributional and efficiency impacts of different allowance allocation schemes motivated by recently proposed U.S. climate legislation for a national cap and trade system using a new dynamic computable general equilibrium model of the U.S. economy. The USREP model tracks nine different income groups and twelve different geographic regions within the U.S. We find that the allocation schemes in all proposals are progressive over the lower half of the income distribution and proportional in the upper half of the income distribution. Scenarios based on the Cantwell-Collins allocation proposal are less progressive in early years and have lower welfare costs due to smaller redistribution to low income households and, consequently, lower income-induced increases in energy demand and less savings and investment. Scenarios based on the three other allocation schemes tend to overcompensate some adversely affected income groups and regions in early years, but this dissipates over time as the allowance allocation effect becomes weaker. Finally, we find that carbon pricing by itself (ignoring the return of carbon revenues through allowance allocations) is proportional to modestly progressive. This striking result follows from the dominance of the sources over uses side impacts of the policy and stands in sharp contrast to previous work that has focused only on the uses side. The main reason is that lower income households derive a large fraction of income from government transfers, and we hold the transfers constant in real terms, reflecting the fact that transfers are generally indexed to inflation. As a result, this source of income is unaffected by carbon pricing while wage and capital income is affected.

August 2, 2010

Comment on 'Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures'

Shanta Devarajan

October 20, 2010

Equity, Heterogeneity and International Environmental Agreements

Charles D Kolstad

Abstract

Much of the literature on international environmental agreements (IEA) considers the case of identical countries. There is a much smaller literature concerning the more complex but more realistic case of country heterogeneity. This paper involves modifying the standard static homogeneous country model of international environmental agreements. In particular, we consider two types of countries, differing in size as well as in marginal damage from pollution. Although the IEA does not have a unique size in this case, we do introduce two equilibrium refinements and explore the implications for coalition size. The two refinements include one based on efficiency and one based on equity.

October 22, 2010

Comment on "Equity, Heterogeneity and International Environmental Agreements"

Scott Barrett

November 4, 2010

Climate Policy's Uncertain Outcomes for Households: The Role of Complex Allocation Schemes in Cap-and-Trade

Joshua Blonz, Dallas Burtraw, Margaret A Walls

Abstract

The design and implementation of the allocation of CO2 emissions allowances in recent bills in the U.S. Congress introduces a new source of uncertainty to the climate policy debate. We examine the Waxman-Markey bill (H.R. 2454) with scenarios that vary outcomes associated with allocations to electricity local distribution companies, investments in energy efficiency and technology development. The average net household burden in 2016 ranges from $133, with a CO2 allowance price of $13.19, to $418, with an allowance price of $23.41. The uncertainty about average burdens does not carry over to the distribution of those burdens; both scenarios impose the greatest burden as a percentage of income on middle-income households. A third scenario that allocates a substantial portion of allowance value as lump-sum payments imposes an average net household burden of $206, with a price of $17.37 and with highly progressive distributional impacts.

November 9, 2010

Comment on "Climate Policy's Uncertain Outcomes for Households: The Role of Complex Allocation Schemes in Cap-and-Trade"

Arik M Levinson

November 19, 2010

The Social Evaluation of Intergenerational Policies and Its Application to Integrated Assessment Models of Climate Change

Louis Kaplow, Elisabeth Moyer, David A Weisbach

Abstract

Assessment of climate change policies requires aggregation of costs and benefits over time and across generations, a process ordinarily done through discounting. Choosing the correct discount rate has proved to be controversial and highly consequential. To clarify past analysis and guide future work, we decompose discounting along two dimensions. First, we distinguish discounting by individuals, an empirical matter that determines their behavior in models, and discounting by an outside evaluator, an ethical matter involving the choice of a social welfare function. Second, for each type of discounting, we distinguish it due to pure time preference from that attributable to curvature of the pertinent function: utility functions (of consumption) for individuals and the social welfare function (of utilities) for the evaluator. We apply our analysis to leading integrated assessment models used to evaluate climate policies. We find that past work often confounds different sources of discounting, and we offer suggestions for avoiding these difficulties. Finally, we relate the standard intergenerational framework that combines considerations of efficiency and distribution to more familiar modes of analysis that assess most policies in terms of efficiency, leaving distributive concerns to the tax and transfer system.

November 29, 2010

Comment on "The Social Evaluation of Intergenerational Policies and Its Application to Integrated Assessment Models of Climate Change"

Martin L Weitzman

December 14, 2010

What are the Costs of Meeting Distributional Objectives for Climate Policy?

Ian W. H. Parry, Roberton C. Williams

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 proposed cap-and-trade programs to reduce domestic, energy-related CO2 emissions. The trade-off between cost effectiveness and distribution is striking. The welfare costs of different policies, accounting for linkages with the broader fiscal system, range from negative $6 billion/year to a positive $53 billion/year in 2020 (or from -$12 to almost $100 per ton of CO2 reductions). The least costly policy involves auctioning all allowances with revenues used to cut 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. Grandfathering permits is both costly and regressive. A distribution-neutral policy entails costs of $18 to $42 per ton.

December 14, 2010

Comment on "What are the Costs of Meeting Distributional Objectives for Climate Policy?"

William Randolph

December 29, 2010

CIM-EARTH: Framework and Case Study

Joshua Elliott, Ian Foster, Kenneth Judd, Elisabeth Moyer, Todd Munson

Abstract

General equilibrium models have been used for decades to obtain insights into the economic implications of policies and decisions. Despite successes, however, these economic models have substantive limitations. Many of these limitations are due to computational and methodological constraints that can be overcome by leveraging recent advances in computer architecture, numerical methods, and economics research. Motivated by these considerations, we are developing a new modeling framework: the Community Integrated Model of Economic and Resource Trajectories for Humankind (CIM-EARTH). In this paper, we describe the key features of the CIM-EARTH framework and initial implementation, detail the model instance we use for studying the impacts of a carbon tax on international trade and the sensitivity of these impacts to assumptions on the rate of change in energy efficiency and labor productivity, and present results on the extent to which carbon leakage limits global reductions in emissions for some policy scenarios.

December 31, 2010

Comment on "CIM-EARTH: Framework and Case Study"

Don Fullerton

December 31, 2010

The Global Effects of Subglobal Climate Policies

Christoph Boehringer, Carolyn Fischer, Knut Einar Rosendahl

Abstract

Individual countries are in the process of legislating responses to the challenges posed by climate change. The prospect of rising carbon prices raises concerns in these nations about the effects on the competitiveness of their own energy-intensive industries and the potential for carbon leakage, particularly leakage to emerging economies that lack comparable regulation. In response, certain developed countries are proposing controversial trade-related measures and allowance allocation designs to complement their climate policies. Missing from much of the debate on trade-related measures is a broader understanding of how climate policies implemented unilaterally (or subglobally) affect all countries in the global trading system. Arguably, the largest impacts are from the targeted carbon pricing itself, which generates macroeconomic effects, terms-of-trade changes, and shifts in global energy demand and prices; it also changes the relative prices of certain energy-intensive goods. This paper studies how climate policies implemented in certain major economies (the European Union and the United States) affect the global distribution of economic and environmental outcomes and how these outcomes may be altered by complementary policies aimed at addressing carbon leakage.

January 1, 2011

Comment on "The Global Effects of Subglobal Climate Policies"

Rodney D. Ludema

January 3, 2011

Analytical General Equilibrium Effects of Energy Policy on Output and Factor Prices

Don Fullerton, Garth Heutel

Abstract

Using an analytical general equilibrium model, we find solutions for the effect of energy policy on factor prices as well as output prices. We calibrate the model to the U.S. economy, and we consider a tax on carbon dioxide. By looking at expenditure and income patterns across household groups, we quantify the uses-side and sources-side incidence of the tax. When households are categorized either by annual income or by total annual consumption as a proxy for permanent income, the uses-side incidence is regressive. This result is robust to sensitivity analysis over various parameter values. The sources-side incidence can be progressive, U-shaped, or regressive. Results on the sources side are sensitive to parameter values.

February 16, 2011

Comment on "Analytical General Equilibrium Effects of Energy Policy on Output and Factor Prices"

Samuel Kortum

April 5, 2011

The Distributional Impact of Climate Policy

Dale W Jorgenson, Richard Goettle, Mun S Ho, Daniel T Slesnick, Peter J Wilcoxen

Abstract

The purpose of this paper is to present a new methodology for evaluating the distributional impacts of climate policy. This methodology builds directly on the framework introduced by Jorgenson, Slesnick, and Wilcoxen (1992), but generalizes it by including leisure time, as well as goods and services, in the measure of household welfare. We provide detailed results for 244 different types of households distinguished by demographic characteristics. In addition, we evaluate the overall impact of a cap-and-trade system, as represented in Energy Modeling Forum 22. While there is a wide range of outcomes for different demographic groups, the impact on economic welfare is regressive and generally negative but relatively small.

April 5, 2011

Comment on "The Distributional Impact of Climate Policy"

Thomas Hertel

May 2, 2011

On the Economics of Climate Policy

Gary S. Becker, Kevin M. Murphy, Robert H. Topel

Abstract

We analyze the central features of economic policies to mitigate climate change. The basic structure of Pigouvian “carbon pricing” is shown to follow from a standard Hotelling problem for the intertemporal pricing of an exhaustible resource. We extend this analysis to consider the strength and timing of research incentives, the costs of implementation delay and the impact of anticipated future technologies on current carbon prices. We study a variety of issues related to the valuation of climate investments, including uncertainty as to the future timing and distribution of climate impacts and the appropriate social rate of discount for valuing policies. Under reasonable circumstances the insurance properties of climate investments may warrant unusually low discount rates. We use the same framework to argue that policy makers in developing countries will discount the expected returns from climate investments more heavily, because such investments have weaker insurance value in the developing world.

November 17, 2011

Comment on "On the Economics of Climate Policy": Is Climate Change Mitigation the Ultimate Arbitrage Opportunity?

Manasi Deshpande, Michael Greenstone

About this journal

Objective
The B.E. Journal of Economic Analysis & Policy (BEJEAP) welcomes submissions that employ microeconomics to analyze issues in organizational economics, consumer behavior, and public policy. Articles submitted to BEJEAP can come in two formats: research papers and letters. Authors should bring to their analysis whatever microeconomic theoretical, experimental or econometric tools are helpful. We publish both empirical work and applied theory (though not more abstract forms of applied theory), and our aim is to disseminate papers that have practical implications for public policy, organizational or individual decision making.

Topics

Design of organizations and institutions
Industrial organization
Health economics
Public finance
Labour Economics
Economics of education, family, development, law, or the environment
Effects of domestic and international policy

Article formats
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