What Are the Costs of Meeting Distributional Objectives in Designing Domestic Climate Policy?

Ian Parry and Roberton Williams

RFF Working Paper Series from Resources for the Future

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 carbon dioxide (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 –$6 billion per year to $53 billion per year in 2020, or between –$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 costs $18–$42 per ton of CO2 reductions.

Keywords: cap-and-trade; welfare cost; distributional incidence; revenue recycling (search for similar items in EconPapers)
JEL-codes: H22 Q48 Q54 Q58 (search for similar items in EconPapers)
Date: 2010-11-16
New Economics Papers: this item is included in nep-ene and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

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