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

Lans Bovenberg, Lawrence H. Goulder () and Derek J. Gurney ()
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Lawrence H. Goulder: Stanford University, NBER, and Resources for the Future
Derek J. Gurney: Stanford University

RAND Journal of Economics, 2005, vol. 36, issue 4, 950-970

Abstract: Many pollution-related industries have political influence sufficient to block policies that would harm their profits. A politically realistic approach to environmental policy seems to require avoiding significant profit-losses to these industries. Using analytically and numerically solved equilibrium models,we examine how the efficiency costs of emissions permits and tax policies change when the policies are designed to insulate profits. The relative increase in efficiency cost associated with protecting profits is highly sensitive to the extent of pollution abatement. Expanded opportunities for end-of-pipe treatment of pollution reduce the absolute efficiency costs of abatement policies, but have little impact on the relative increase in efficiency costs attributable to the constraint on profits.

Date: 2005
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