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

Author

Listed:
  • Parry Ian W. H.

    (Resources for the Future)

  • Williams Roberton C.

    (University of Maryland, Resources for the Future, and NBER)

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.

Suggested Citation

  • Parry Ian W. H. & Williams Roberton C., 2010. "What are the Costs of Meeting Distributional Objectives for Climate Policy?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-35, December.
    • Handle: RePEc:bpj:bejeap:v:10:y:2010:i:2:n:9
    DOI: 10.2202/1935-1682.2552
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    References listed on IDEAS

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    More about this item

    Keywords

    cap-and-trade; welfare cost; distributional incidence; revenue-recycling;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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