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Options for Returning the Value of CO2 Emissions Allowances to Households

Author

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  • Burtraw, Dallas

    (Resources for the Future)

  • Parry, Ian W.H.

    (Resources for the Future)

Abstract

This paper examines alternative ways that the value of CO2 emissions allowances created under cap-and-trade policy could be returned to households. One approach (based on principles of economic efficiency) is effectively a “tax shift” that would use revenues from an auction of CO2 emissions allowances to reduce preexisting distortionary taxes. A second approach (based on principles of property rights for common-pool resources), known as cap-and-dividend, would refund allowance value as equal lump-sum cash transfers to households. Economic theory suggests (with some caveats) that a tax shift would be considerably less costly to the overall economy. In contrast, cap-and-dividend provides ample compensation for low-income households, though it appears to be more costly than other approaches, including perhaps well-designed regulatory policies. A dividend approach might be combined with other policies to provide incentives for households to invest in energy-efficient technologies and thereby lower the costs of the carbon policy.

Suggested Citation

  • Burtraw, Dallas & Parry, Ian W.H., 2011. "Options for Returning the Value of CO2 Emissions Allowances to Households," RFF Working Paper Series dp-11-03, Resources for the Future.
  • Handle: RePEc:rff:dpaper:dp-11-03
    as

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-11-03.pdf
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    References listed on IDEAS

    as
    1. Thaler, Richard H, 1990. "Saving, Fungibility, and Mental Accounts," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 193-205, Winter.
    2. Ian W.H. Parry & Antonio M. Bento, 2002. "Tax Deductions, Environmental Policy, and the "Double Dividend" Hypothesis," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 22, pages 397-426, Edward Elgar Publishing.
    3. Matthew Riddle & James Boyce, 2007. "Cap and Dividend: How to Curb Global Warming while Protecting the Incomes of American Families," Working Papers wp150, Political Economy Research Institute, University of Massachusetts at Amherst.
    4. Palmer, Karen & Burtraw, Dallas & Paul, Anthony, 2009. "Allowance Allocation in a CO2 Emissions Cap-and-Trade Program for the Electricity Sector in California," RFF Working Paper Series dp-09-41, Resources for the Future.
    5. Chang-Tai Hsieh, 2003. "Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund," American Economic Review, American Economic Association, vol. 93(1), pages 397-405, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kuang-Sheng Liu & Sung-Lin Hsueh & Wen-Chen Wu & Yu-Lung Chen, 2012. "A DFuzzy-DAHP Decision-Making Model for Evaluating Energy-Saving Design Strategies for Residential Buildings," Energies, MDPI, vol. 5(11), pages 1-19, November.
    2. Dallas Burtraw & Samantha Sekar, 2014. "Two world views on carbon revenues," Journal of Environmental Studies and Sciences, Springer;Association of Environmental Studies and Sciences, vol. 4(1), pages 110-120, March.

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    More about this item

    Keywords

    cap-and-trade; auction tax shift; revenue recycling; tax interaction; dividends;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • 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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