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

Ian Parry and Roberton Williams

No 16486, NBER Working Papers from National Bureau of Economic Research, Inc

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 prospective 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 $53 billion/year in 2020, or between minus $12 to almost $100 per ton of CO2 reductions! The least costly policy involves auctioning all allowances with revenues used to cut proportional 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, and grandfathering permits is both costly and regressive. A distribution-neutral policy entails costs of $18 to $42 per ton of CO2 reductions.

JEL-codes: H22 H23 Q48 Q54 Q58 (search for similar items in EconPapers)
Date: 2010-10
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Note: EEE PE
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Citations: View citations in EconPapers (53)

Published as Ian W. H. Parry & Roberton C. Williams III, 2010. "What are the Costs of Meeting Distributional Objectives for Climate Policy?," The B.E. Journal of Economic Analysis & Policy, Berkeley Electronic Press, vol. 10(2), pages 9.

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Journal Article: What are the Costs of Meeting Distributional Objectives for Climate Policy? (2010)
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