Paul L. Caron

Saturday, September 19, 2009

Roberts: Mitigating the Distributional Impacts of Climate Change Policy

Tracey M. Roberts (Research Affiliate, Vanderbilt University, Climate Change Research Network) has posted Mitigating the Distributional Impacts of Climate Change Policy, 67 Wash. & Lee L. Rev. ___ (2010), on SSRN. Here is the abstract:

Under both a cap-and-trade system and a greenhouse gas tax the statutory incidence of the regulation will fall upon the energy suppliers and distributors, utility companies and large manufacturers. The economic incidence, however, will be borne primarily by consumers; these parties will bear the financial impacts of the regulation of greenhouse gas emissions in the form of increased costs of gasoline, electricity, and home heating fuels and in increased consumer prices for all goods manufactured or distributed using fossil fuels. The regulation will also generate significant revenue from this former consumer surplus. This paper addresses the question of what should be done with those revenues.

Economic models of the incidence of the two systems indicate that while high-income households will bear a larger portion of the distributional impacts because they consume more, low-income households will bear a disproportionate burden as a percentage of their household income. In view of the political challenges associated with redistribution, the practical challenges associated with calculating the net burdens of environmental regulation, and the central importance of protecting the least advantaged in society, this paper proposes that the optimal regulatory regime is one that neutralizes the distributional impacts. This may be achieved if the government captures revenues from a cap-and-trade system or a greenhouse gas tax and uses those revenues to issue a rebate that is proportional to household income and scaled according to household size. The paper also suggests that the most efficient method for delivering the rebate is to issue a refundable tax credit through t he income tax system, based on the institutional compatibility of that system with the regulatory and distributional goals of the policy

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