Environmental Taxes: Dead or Alive?

Both theory and recent trends suggest some optimism for the future of environment-related taxes. While new research emphasizes the potentially significant distortions created by environmental taxes and appears to undermine the so-called "double dividend" theory, it also suggests that virtually any environmental policy, including regulations, taxes, and tradable permits, can compound existing distortions in the tax system. Currently, direct environmental taxes, such as per-unit charges on emissions, are only in limited use; however, indirect environmental levies, including taxes on fuels, vehicles, beverage containers, and fertilizers, are growing in importance across the OECD nations. Over the period 1990-1993, environmental taxes as a share of total revenue increased while taxes on personal and corporate income declined slightly, indicating a modest tax shift.

Does the Provision of Free Technical Information Really Influence Firm Behavior?

Significant environmental benefits are often associated with the rapid diffusion of new energy-saving technologies. Over the past decade, the federal government, as well as electric and gas utilities, have begun to provide free technical information to potential buyers to stimulate private investment in certain technologies, particularly for retrofitting existing buildings. Yet it has not been demonstrated that this provision of technical information can truly accelerate the rate of technology diffusion. This study develops a model of firm behavior that incorporates multiple factors in the decision to retrofit high efficiency lighting technologies. Technology retrofit and the acceptance of technical information are modeled as jointly determined dichotomous variables, and their determinants are estimated using a bivariate probit specification. The principal conclusion is that information programs make a significant contribution to the diffusion of high efficiency lighting in commercial office buildings, although these programs are less important than basic price signals.

Evaluating Regulatory Impact Analyses

Federal agencies in the United States are required to prepare regulatory impact analyses (RIAs) for every major regulatory action they undertake. Increasingly, other OECD countries are imposing similar requirements. However, there has been little examination of the quality of these documents or of the uses to which they have been put in the regulatory process or elsewhere. In this paper we survey previous efforts to evaluate RIAs and find a fair amount of evaluation of RIAs as stand-alone documents, but much less evaluation of their contribution to producing better regulations.regulation, RIA, benefit-cost analysis, cost-effectiveness analysis

Carbon Abatement Costs: Why the Wide Range of Estimates?

Estimates of marginal abatement costs for reducing carbon emissions derived from major economic-energy models vary widely. Controlling for policy regimes, we use meta-analysis to examine the importance of structural modeling choices in explaining differences in estimates. The analysis indicates that particular assumptions about perfectly foresighted consumers and Armington trade elasticities generate lower estimates of marginal abatement costs. Other choices are associated with higher cost estimates, including perfectly mobile capital, inclusion of a backstop technology, and greater disaggregation among regions and sectors. Some features, such as greater technological detail, seem less significant. Understanding the importance of key modeling assumptions, as well as the way the models are used to estimate abatement costs, can help guide the development of consistent modeling practices for policy evaluation.climate models, carbon tax

Alternative Approaches to Cost Containment in a Cap-and-Trade System

We compare several emissions reduction instruments, including quantity policies with banking and borrowing, price policies, and hybrid policies (safety valve and price collar), using a dynamic model with stochastic baseline emissions. The instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options. Based on simulation analysis with the model parameterized to values relevant to proposed U.S. climate mitigation policies, we find that restrictions on banking and borrowing, including the provision of interest rates on the borrowings, can severely limit the value of the policy, depending on the regulator-chosen allowance issuance path. Although emissions taxes generally provide the lowest expected abatement costs, a cap-and-trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax, but with lower emissions variance than a tax. Consistently, a price collar is more cost-effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline.cost containment, safety valve, price collar, climate change

The Economics of "When" Flexibility in the Design of Greenhouse Gas Abatement Policies

This paper focuses on the economic desirability of the fixed and relatively short-term greenhouse gas targets and timetables in the Kyoto Protocol. The Protocol provides flexibility in which greenhouse gases to control, where control can be implemented, and what domestic policy measures are used. However, the Protocol does not allow much flexibility in when emission reductions take place in pursuit of longer-term environmental goals. Nor does it allow more flexible shorter-term environmental targets through price-based policy instruments that balance environmental goals and compliance costs. The relative inflexibility of the Protocol with respect to these elements may derive, in part, from a misplaced analogy between the global warming issue and the highly successful effort to phase out CFCs under the Montreal Protocol. The lack of "when" flexibility may be a key barrier to achieving the broader goals of the Kyoto Protocol, particularly if "where" flexibility is constrained in implementing the Protocol.

The Ancillary Carbon Benefits of SO2 Reductions from a Small-Boiler Policy in Taiyuan, PRC

To reduce carbon emissions worldwide, it makes sense to consider the possibility of developed countries paying for carbon reductions in developing countries. Developing countries may be interested in such activities if the ancillary air pollution benefits are large. This paper reports on an RFF survey of the emissions benefits (and costs) of reducing sulfur dioxide (SO2) emissions from small, coal-burning boilers in Taiyuan, an industrial, northern Chinese city that recently banned uncontrolled coal combustion in certain small boilers in the downtown area. We find significant carbon benefits in percentage terms - on the order of 50% to 95% reduction - associated with this SO2 control policy, with large reduction potential elsewhere in Taiyuan and China. While the cost for boilers that switched out of coal was almost $3,600 per ton of SO2 reduced, these ancillary carbon reductions are truly "free" from a social cost perspective.Carbon, air pollution, informal sector, ancillary benefits, abatement costs, survey

Priority-Setting at the Environmental Protection Agency, and Comparative Analysis of Environmental Problems to Support It

13 pages. Contains footnotes

Understanding Errors in EIA Projections of Energy Demand

This paper investigates the potential for systematic errors in the Energy Information Administration’s (EIA) widely used Annual Energy Outlook, focusing on the near- to midterm projections of energy demand as measured in physical quantities. Overall, based on an analysis of the EIA’s 22-year projection record, we find a fairly modest but persistent tendency to underestimate total energy demand by an average of 2 percent per year over the one- to five-year projection horizon after controlling for projection errors in gross domestic product, oil prices, and heating/cooling degree days. For the 14 individual fuels/consuming sectors routinely reported by the EIA, we observe a great deal of directional consistency in the error patterns over time, ranging up to 7 percent per year. Electric utility renewables, electric utility natural gas, transportation distillate, and residential electricity all show significant biases, on average, across the full five year projection horizon examined. Projections for certain other fuels/consuming sectors have significant unexplained errors for selected time horizons. Independent evaluation of this type can be useful for validating ongoing analytic efforts and for prioritizing future model revisions.EIA, energy forecasting, bias

The Impact on U.S. Industries of Carbon Prices with Output-Based Rebates over Multiple Time Frames

The effects of a carbon price on U.S. industries are likely to change over time as firms and customers gradually adjust to new prices. The effects will also depend on the number of countries implementing the policy as well as offsetting policies to compensate losers. We examine the effects of a $15/ton CO2 price, including Waxman-Markey-type allocations to vulnerable industries, over four time horizons -- the very short-, short-, medium-, and long-runs -- distinguished by the ability of firms to raise output prices, change their input mix, and reallocate capital. We find that if firms cannot pass on higher costs, the loss in profits in a number of industries will indeed be large. When output prices can rise to reflect higher energy costs, the reduction in output and profits is substantially smaller. Over the medium- and long-terms, however, when more adjustments occur, the impact on output is more varied due to general equilibrium effects. The use of the H.R. 2454 rebates can substantially offset the output losses over all four time frames considered. We also consider competitiveness and leakage effects—changes in trade flows and changes in emissions in the rest of the world. We examine two measures of leakage: “trade-related” leakage that accounts for both the increased volume of net imports into the U.S. as well as the higher carbon intensity of these imports, and a broader leakage measure that includes the effect of increased fossil fuel consumption in countries not undertaking a carbon-pricing policy.carbon price, competitiveness, input-output analysis, output-based allocations, carbon leakage