Carolyn Fischer

Instrument choice for environmental protection when technological innovation is endogenous

This paper presents an analytical and numerical comparison of the welfare impacts of alternative instruments for environmental protection in the presence of endogenous technological innovation. We analyze emissions taxes and both auctioned and free (grandfathered) emissions permits. We find that under different sets of circumstances each of the three policies may induce a significantly higher welfare gain than the other two policies. In particular, the relative ranking of policy instruments can crucially depend on the ability of adopting firms to imitate the innovation, the costs of innovation, the slope and level of the marginal environmental benefit function, and the number of firms producing emissions. Moreover, although in theory the welfare impacts of policies differ in the presence of innovation, sometimes these differences are relatively small. In fact, when firms anticipate that policies will be adjusted over time in response to innovation, certain policies can become equivalent. Our analysis is simplified in a number of respects; for example, we assume homogeneous and competitive firms. Nonetheless, our preliminary results suggest there is no clear-cut case for preferring any one policy instrument on the grounds of dynamic efficiency.

Combining policies for renewable energy : Is the whole less than the sum of its parts?

Since the energy crisis in the 1970s and later the growing concern for climate change in the 1990s, policymakers at all levels of government and around the world have been enthusiastically supporting a wide range of incentive mechanisms for electricity from renewable energy sources (RES-E). Motivations range from energy security to environmental preservation to green jobs and innovation, and measures comprise an array of subsidies to mandates to emissions trading. But do these policies work together or at cross-purposes? To evaluate RES-E policies, one must understand how specific policy mechanisms interact with each other and under what conditions multiple policy levers are necessary. In this article, we review the recent environmental economics literature on the effectiveness of RES-E policies and the interactions between them, with a focus on the increasing use of tradable quotas for both emissions reduction and RES-E expansion.

Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions

The allocation of tradable emissions permits has important efficiency as well as distributional effects when tax and trade distortions are taken into account. We compare different rules for allocating carbon allowances within sectors (lump-sum grandfathering, output-based allocation (OBA), auctioning) and among sectors (historical emissions or value-added shares). The output subsidies implicit in OBA mitigate tax interactions, unlike grandfathering. OBA with sectoral distributions based on value added is similar to revenue recycling with auctioning. OBA based on historical emissions supports heavier polluters, more effectively counteracting carbon leakage, but at higher welfare costs. Less energy-intensive sectors are also sensitive to allocation rules. (JEL Q 53)

The Global Effects of Subglobal Climate Policies

Individual countries are in the process of legislating responses to the challenges posed by climate change. The prospect of rising carbon prices raises concerns in these nations about the effects on the competitiveness of their own energy-intensive industries and the potential for carbon leakage, particularly leakage to emerging economies that lack comparable regulation. In response, certain developed countries are proposing controversial trade-related measures and allowance allocation designs to complement their climate policies. Missing from much of the debate on trade-related measures is a broader understanding of how climate policies implemented unilaterally (or subglobally) affect all countries in the global trading system. Arguably, the largest impacts are from the targeted carbon pricing itself, which generates macroeconomic effects, terms-of-trade changes, and shifts in global energy demand and prices; it also changes the relative prices of certain energy-intensive goods. This paper studies how climate policies implemented in certain major economies (the European Union and the United States) affect the global distribution of economic and environmental outcomes, and how these outcomes may be altered by complementary policies aimed at addressing carbon leakage.

Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives

This article discusses automobile fuel economy standards in the United States and other countries. We first describe how these programs affect the automobile market, including impacts on fuel consumption and other dimensions of the vehicle fleet. We then review two different methodologies for assessing the costs of fuel economy programs—engineering and market-based approaches—and discuss what the results of these assessments imply for policy. Next we compare the welfare effects of fuel economy standards and fuel taxes and discuss whether these two types of policies can be complementary. Finally, we review arguments for transitioning away from fuel economy regulations and toward a “feebate” system, a policy approach that imposes fees on vehicles that are fuel inefficient and provides rebates to those that are fuel efficient.

How Large Are the Welfare Gains from Technological Innovation Induced by Environmental Policies

This paper examines whether the welfare gains from technological innovation that reduces future abatement costs are larger or smaller than the “Pigouvian” welfare gains from optimal pollution control. The relative welfare gains from innovation depend on three key factors—the initially optimal level of abatement, the speed at which innovation reduces future abatement costs, and the discount rate. We calculate the welfare gains from innovation under a variety of different scenarios. Mostly they are less than the Pigouvian welfare gains. To be greater, innovation must reduce abatement costs substantially and quickly and the initially optimal abatement level must be fairly modest.

Does Trade Help or Hinder the Conservation of Natural Resources

Trade exerts important influences on the exploitation and protection of natural resources. Indeed, recognition of this influence is codified in the General Agreement on Tariffs and Trade, which allows exceptions to treaty obligations for measures “relating to the conservation of exhaustible natural resources,” motivates the Convention on International Trade in Endangered Species, and underlies the Convention on Biological Diversity. Trade impacts operate through several channels. Trade liberalization changes relative prices, which affects exploitation incentives. Trade can also have broader effects, such as impacts on labor markets and incomes, which may affect demand for resource-intensive products—or for ecosystem services. Trade interacts with, and can influence, the institutions governing the management of natural resources. Finally, trade can also introduce threats to ecosystems, in the form of invasive species. All of these potential impacts pose special challenges for the conservation of renewable resources, which inherently involves dynamic economic and ecological processes. This article reviews and takes stock of the lessons from the recent economics literature on the links between trade and the conservation of natural resources.

Combining Rebates with Carbon Taxes: Optimal Strategies for Coping with Emissions Leakage and Tax Interactions

Emissions regulations like carbon pricing raise the price of covered sector goods and thus can interact with and exacerbate other preexisting distortions in the economy. One such distortion is labor taxes. Another is emissions “leakage” due to the lack of comparable emissions pricing abroad or among other emitting sectors at home. A potential response is to combine the emissions tax with a rebate to production to mitigate the price increases. We use an optimal tax framework to solve for the optimal emissions tax and output rebate, given these distortions. We then employ a multisector computable general equilibrium model based on the GTAP framework to simulate the effects of a

Optimal investment in clean production capacity

50 per-ton carbon tax on the major emissions-intensive sectors in the U.S. economy and estimate optimal rebates by sector.

Short-Run Allocation of Emissions Allowances and Long-Term Goals for Climate Policy

For the mitigation of long-term pollution threats, one must consider that both the process of environmental degradation and the switchover to new and cleaner technologies are dynamic. We develop a model of a uniform good that can be produced by either a polluting technology or a clean one; the latter is more expensive and requires investment in capacity. We derive the socially optimal pollution stock accumulation and creation of nonpolluting production capacity, weighing the tradeoffs among consumption, investment and djustment costs, and environmental damages. We consider the effects of changes in the pollution decay rate, the capacity depreciation rate, and the initial state of the environment on both the steady state and the transition period. The optimal transition path looks quite different with a clean or dirty initial environment. With the former, investment is slow and the price of pollution may overshoot the long-run optimum before converging. With the latter, capacity may overshoot.