Jared C. Carbone

Embodied Carbon Tariffs

In a world where the prospects of a global agreement to control greenhouse gas emissions are bleak, the idea of using trade policy as an implicit regulation of foreign emission sources has gained many supporters in countries contemplating unilateral climate policies. Embodied carbon tariffs tax the direct and indirect carbon emissions embodied in imported goods. The appeal seems obvious: as OECD countries are, on average, large net importers of embodied emissions from non-OECD countries, carbon tariffs could substantially extend the reach of OECD climate policies. We investigate this claim by simulating the effects of embodied carbon tariffs with a computable general equilibrium model of global trade and energy use. We find that embodied carbon tariffs do effectively reduce carbon leakage. However, the scope for improvements in the global cost-effectiveness of unilateral climate policy is limited. The main welfare effect of the tariffs is to shift the burden of OECD climate policy to the developing world.

The Initial Incidence of a Carbon Tax Across Income Groups

Carbon taxes efficiently reduce greenhouse gas emissions but are criticized as regressive. This paper links dynamic overlapping-generation and microsimulation models of the United States to estimate the initial incidence. We find that while carbon taxes are regressive, the incidence depends much more on how carbon tax revenue is used. Recycling revenues to cut capital taxes is efficient but exacerbates regressivity. Lump-sum rebates are less efficient but much more progressive, benefiting the three lower income quintiles even when ignoring environmental benefits. A labor tax swap represents an intermediate option, more progressive than a capital tax swap and more efficient than a rebate.

The Initial Incidence of a Carbon Tax Across US States

Carbon taxes introduce potentially uneven cost burdens across the population. The distribution of these costs is especially important in affecting political outcomes. This paper links dynamic overlapping-generations and microsimulation models of the United States to estimate the initial incidence of a carbon tax across states. Geographic differences in incidence are driven primarily by differences in sources of income. Differing patterns of energy use also matter but are relatively less important. The use of the carbon tax revenue plays an important role, particularly in determining how different income sources are affected, as: (1) using carbon tax revenue to cut capital taxes disproportionately benefits states with large shares of capital income; (2) returning the revenue via lump-sum transfers favors relatively low-income states; and (3) returning the revenue via cuts in labor taxes provides a relatively even distribution of cost across states. In general, geographic differences in incidence are substantially smaller than the differences across income groups.

Should Benefit–Cost Analyses Take Account of General Equilibrium Effects?

This paper demonstrates the importance of general equilibrium (GE) feedback effects inside and outside markets for the measurement of the efficiency costs of taxes in a distorted economy. Our specific focus is on the changes in environmental amenities that can result from pollution externalities generated from production activities. Even when amenities are under three percent of virtual income, the error in the GE approximations of the welfare effects of new taxes with pre-existing distortions can increase threefold. The nature of the link between the source of the external effects influencing amenities and the changes in amenity services can alter the conclusions one would make about the merits of an intervention based on benefit–cost analyses.

The Impacts of Unilateral Climate Policy on Competitiveness: Evidence From Computable General Equilibrium Models

When considering the adoption of a domestic climate change policy, politicians and the public frequently raise concerns about competitiveness. Competitiveness in this context does not have a precise economic definition. In this article we discuss possible ways to anchor the concept of competitiveness in economic analysis. We then use this framework as the basis for a systematic survey of the literature on the quantitative impacts of unilateral climate change policy, which are derived from the results of computable general equilibrium (CGE) models. We present empirical estimates from this literature on the magnitude of competitiveness effects that might be associated with the adoption of unilateral climate change policies. We find that there is significant agreement in the literature that unilateral emissions abatement is likely to lead to modest reductions in output and exports from emissions-intensive trade-exposed (EITE) sectors. On average, policies designed to reduce economy-wide emissions by 20 percent are estimated to reduce EITE output by 5 percent and exports by 7 percent. We also find that the results of models are highly dependent on modeling assumptions. Finally, we propose some avenues for future research using CGE models.

Environmental Amenities and General Equilibrium Deadweight Loss

This paper develops an analytical extension and numerical assessment of the importance of market and non-market distortions for the measurement of the deadweight losses associated with new tax or regulations. We build on the Goulder & Williams (2003) evaluation of tax interactions for Harbergerian measures of excess burden. Our primary focus is on the demand for environmental amenities. We find that treating air quality as a non-separable argument in the description of aggregate demands for the US economy changes estimates of excess burden as much as 30% in simulations where the benchmark value of the amenity represents less than 1% of GDP.

Individual Investments in Education and Health

Empirical studies show that years of schooling are positively correlated with good health, and that education is better correlated with health than with variables like occupation and income. This can be explained in different ways as the implication may go from education to health, from health to education, and there may be variables that influence health and education in the same direction. The effect of different policy instruments to reduce the social gradient in health will depend on the strength of these causalities. In this paper we formalize a model that simultaneously determines an individual’s demand for knowledge and health based on the mentioned causal effects. We study the impacts on both health and education of different policy instruments such as subsidies on medical care, subsidizing schooling, income tax reduction, lump sum transfers and improving health at young age. Our results indicate that income transfers such as distributional policies may be the best instrument to improve welfare, while subsidies to medical care is the best instrument for longevity. However, subsidies to medical care or education would require large imperfections in the markets for health and education to be more welfare improving than distributional policies. Finally, our simulations suggest that underlying factors that impact both health and education is the main explanation for the correlation shown empirically.

Smoking and Health Investments: Impacts of Health Adaptation and Damage Reversibility

In the present paper we examine how different sets of beliefs about the health effects of smoking would influence a rational smoker. By embedding the rational addiction theory in a Grossman model of health investment modified to take account of psychological adaptation effects, we present a model of a rational addict that allows us to explicitly specify beliefs about a direct and indirect effect on both death risk and utility. This allows us to study how a rational addict would smoke with different beliefs of cancer risks, and with or without the well-documented ability to adapt to health changes. Numerical simulation results illustrate a number of different incentives that influence the smoking paths and health investments under the various beliefs, and suggests that beliefs have different impacts at different ages, providing a richer set of dynamics than might initially be expected.

Individual Investments in Education and Health: Policy Responses and Interactions

Empirical studies show that years of schooling are positively correlated with good health. The implication may go from education to health, from health to education, or from factors that influence both variables. We formalize a model that determines an individual’s demand for knowledge and health based on the causal effects, and study the impacts on the individual’s decisions of policy instruments such as subsidies on medical care, subsidizing schooling, income tax reduction, lump sum transfers and improving health at young age. Our results indicate that income redistribution policies may be the best instrument to improve welfare, while a medical care subsidy is the best instrument for longevity. Subsidies to medical care or education would require large imperfections in these markets to be more welfare improving than distributional policies.

Self-Enforcing Agreements and International Trade in Greenhouse Gas Emission Rights

The success of any international climate change agreement depends on abatement targets and the incentives for countries to participate. We demonstrate that international emission trading is effective in making headway on both issues despite the assumption that countries choose their permit endowments non-cooperatively. Developing countries are lured into a trading system by the prospective rents from permit sales. Developed countries benefit from the reduced cost of emission abatement. Using a calibrated representation of the global economy in seven sectors and six regions, we find that the most effective permit-trading agreements are sub-global and yield abatement at approximately twice the level achieved in a world without permit trading.