Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes

A.L. Bovenberg, L.H. Goulder, D.J. Gurney

Research output: Working paperDiscussion paperOther research output

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Abstract

Many pollution-related industries wield strong political influence and can e.ectively veto policy initiatives that would harm their profits.A politically realistic approach to environmental policy therefore seems to require the alleviation of significant profitlosses to these industries.The regulatory authority can do this by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax.However, such policies compel the government to forego an e.cient potential revenue source and to rely more heavily on ordinary distortionary taxes.As a result, achieving distributional objectives comes at a cost in terms of e.ciency.Using analytically and numerically solved equilibrium models, we analyze the e.- ciency costs implied by the distributional constraint that adverse impacts on profits in particular industries must be avoided.Both models indicate that the e.ciency cost implied by this constraint dwarfs the other e.ciency costs when the required amount of abatement is very small.When the abatement requirement becomes more extensive, however, the cost of this constraint diminishes relative to the other e.ciency costs of pollution-control.We also calculate the compensation ratio: the share of potential policy revenue that the government must forego to protect the industries in question.We show how this ratio is a.ected by the extent of abatement, supply and demand elasticities, and the potential for end-of-pipe treatment.One definition of this ratio corresponds to the share of pollution permits that must be freely allocated to prevent profit-losses in the targeted industries.Numerical simulations of sulfur dioxide pollution-control suggest that the Bush Administration s Clear Skies Initiative would exceed this ratio, freely allocating more permits than necessary to preserve profits.Our models also highlight significant di.erences between gross and net policy revenues: when abatement is extensive, a large fraction of the revenue collected from emissions permits or taxes is o.set by the revenue-loss from erosion of the base of existing factor taxes.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages58
Volume2003-86
Publication statusPublished - 2003

Publication series

NameCentER Discussion Paper
Volume2003-86

Fingerprint

Industry
Tax
Costs
Revenue
Profit
Abatement
Pollution control
Government
Emission permits
Authority
Sulfur dioxide
Pollution
Demand elasticity
Pollution tax
Environmental policy
Emission taxes
Distortionary taxes
Factors
Numerical simulation
George W. Bush

Keywords

  • efficiency
  • costs
  • environmental tax
  • pollution
  • environmental policy

Cite this

Bovenberg, A. L., Goulder, L. H., & Gurney, D. J. (2003). Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes. (CentER Discussion Paper; Vol. 2003-86). Tilburg: Macroeconomics.
Bovenberg, A.L. ; Goulder, L.H. ; Gurney, D.J. / Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes. Tilburg : Macroeconomics, 2003. (CentER Discussion Paper).
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Bovenberg, AL, Goulder, LH & Gurney, DJ 2003 'Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes' CentER Discussion Paper, vol. 2003-86, Macroeconomics, Tilburg.

Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes. / Bovenberg, A.L.; Goulder, L.H.; Gurney, D.J.

Tilburg : Macroeconomics, 2003. (CentER Discussion Paper; Vol. 2003-86).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes

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AU - Goulder, L.H.

AU - Gurney, D.J.

N1 - Pagination: 58

PY - 2003

Y1 - 2003

N2 - Many pollution-related industries wield strong political influence and can e.ectively veto policy initiatives that would harm their profits.A politically realistic approach to environmental policy therefore seems to require the alleviation of significant profitlosses to these industries.The regulatory authority can do this by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax.However, such policies compel the government to forego an e.cient potential revenue source and to rely more heavily on ordinary distortionary taxes.As a result, achieving distributional objectives comes at a cost in terms of e.ciency.Using analytically and numerically solved equilibrium models, we analyze the e.- ciency costs implied by the distributional constraint that adverse impacts on profits in particular industries must be avoided.Both models indicate that the e.ciency cost implied by this constraint dwarfs the other e.ciency costs when the required amount of abatement is very small.When the abatement requirement becomes more extensive, however, the cost of this constraint diminishes relative to the other e.ciency costs of pollution-control.We also calculate the compensation ratio: the share of potential policy revenue that the government must forego to protect the industries in question.We show how this ratio is a.ected by the extent of abatement, supply and demand elasticities, and the potential for end-of-pipe treatment.One definition of this ratio corresponds to the share of pollution permits that must be freely allocated to prevent profit-losses in the targeted industries.Numerical simulations of sulfur dioxide pollution-control suggest that the Bush Administration s Clear Skies Initiative would exceed this ratio, freely allocating more permits than necessary to preserve profits.Our models also highlight significant di.erences between gross and net policy revenues: when abatement is extensive, a large fraction of the revenue collected from emissions permits or taxes is o.set by the revenue-loss from erosion of the base of existing factor taxes.

AB - Many pollution-related industries wield strong political influence and can e.ectively veto policy initiatives that would harm their profits.A politically realistic approach to environmental policy therefore seems to require the alleviation of significant profitlosses to these industries.The regulatory authority can do this by freely allocating some emissions permits or by exempting some inframarginal emissions from a pollution tax.However, such policies compel the government to forego an e.cient potential revenue source and to rely more heavily on ordinary distortionary taxes.As a result, achieving distributional objectives comes at a cost in terms of e.ciency.Using analytically and numerically solved equilibrium models, we analyze the e.- ciency costs implied by the distributional constraint that adverse impacts on profits in particular industries must be avoided.Both models indicate that the e.ciency cost implied by this constraint dwarfs the other e.ciency costs when the required amount of abatement is very small.When the abatement requirement becomes more extensive, however, the cost of this constraint diminishes relative to the other e.ciency costs of pollution-control.We also calculate the compensation ratio: the share of potential policy revenue that the government must forego to protect the industries in question.We show how this ratio is a.ected by the extent of abatement, supply and demand elasticities, and the potential for end-of-pipe treatment.One definition of this ratio corresponds to the share of pollution permits that must be freely allocated to prevent profit-losses in the targeted industries.Numerical simulations of sulfur dioxide pollution-control suggest that the Bush Administration s Clear Skies Initiative would exceed this ratio, freely allocating more permits than necessary to preserve profits.Our models also highlight significant di.erences between gross and net policy revenues: when abatement is extensive, a large fraction of the revenue collected from emissions permits or taxes is o.set by the revenue-loss from erosion of the base of existing factor taxes.

KW - efficiency

KW - costs

KW - environmental tax

KW - pollution

KW - environmental policy

M3 - Discussion paper

VL - 2003-86

T3 - CentER Discussion Paper

BT - Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes

PB - Macroeconomics

CY - Tilburg

ER -

Bovenberg AL, Goulder LH, Gurney DJ. Efficiency Costs of Meeting Industry-Distributional Constraints under Environmental Permits and Taxes. Tilburg: Macroeconomics. 2003. (CentER Discussion Paper).