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Is Broader Always Better? Preexisting Distortions, Emissions Elasticities, and the Scope of Emissions Pricing

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  • Hafstead, Marc

    (Resources for the Future)

  • Williams III, Roberton C.

    (Resources for the Future)

  • Goulder, Lawrence H.

    (Resources for the Future)

Abstract

Economists often regard a broad-based price on carbon (whether in the form of a carbon tax or cap and trade) as the most efficient policy to reduce carbon dioxide emissions. Relative to a narrower policy that omits some emissions sources, a broader policy is often favored because it can exploit more low-cost emissions reduction opportunities and cause less emissions leakage to uncovered sources. Yet narrower approaches have gained considerable political support, in part because they avoid price increases for outputs (such as gasoline) regarded as especially critical to household budgets.Some analysts might lament any shift away from broad carbon pricing, citing potential efficiency costs. However, this paper offers theory and numerical simulations that reveal that such a shift need not involve an efficiency sacrifice.This result stems from differences across sectors in distortions from preexisting taxes and in the elasticity of a sector’s emissions to the carbon price. Our analytical model reveals that a narrow carbon price policy that exploits these differences can be more cost-effective than a policy with a broad, economy-wide tax base.Our numerical model of the US economy then compares quantitatively the effects of an economy-wide carbon price with those of a range of narrower policies, including a policy that applies only to the power sector, one that exempts gasoline, and one that exempts energy-intensive trade-exposed industries. We make these comparisons under a range of specifications for policy stringency and find that the ratio of the broader policy’s cost to the narrower one’s declines with the ambitiousness of the emissions reduction target and that a broader policy always becomes more cost-effective at sufficiently high stringency.

Suggested Citation

  • Hafstead, Marc & Williams III, Roberton C. & Goulder, Lawrence H., 2024. "Is Broader Always Better? Preexisting Distortions, Emissions Elasticities, and the Scope of Emissions Pricing," RFF Working Paper Series 24-13, Resources for the Future.
  • Handle: RePEc:rff:dpaper:dp-24-13
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    References listed on IDEAS

    as
    1. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    2. Jorgenson, Dale W. & Wilcoxen, Peter J., 1993. "Reducing US carbon emissions: an econometric general equilibrium assessment," Resource and Energy Economics, Elsevier, vol. 15(1), pages 7-25, March.
    3. Lawrence H. Goulder & Marc A. C. Hafstead & Roberton C. Williams III, 2016. "General Equilibrium Impacts of a Federal Clean Energy Standard," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 186-218, May.
    4. Don Fullerton & Gilbert E. Metcalf, 2002. "Environmental Controls, Scarcity Rents, and Pre-existing Distortions," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 26, pages 504-522, Edward Elgar Publishing.
    5. Ian W.H. Parry, 2002. "Pollution Taxes and Revenue Reycling," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 15, pages 235-248, Edward Elgar Publishing.
    6. Jorgeson, Dale W. & Goettle, Richard & Ho, Mun S. & Wilcoxen, Peter, 2013. "Double Dividend: Environmental Taxes and Fiscal Reform in the United States," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262027097, December.
    7. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
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    More about this item

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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