Lawrence H. Goulder

Environmental Taxation and the 'Double Dividend: A Reader's Guide'

There has been considerable debate as to whether the revenue-neutral substitution of environmental taxes for ordinary income taxes might offer a double dividend: not only (1) improve the environment but also (2) reduce certain costs of the tax system. This paper articulates different notions of double dividend and examines the theoretical and empirical evidence for each. It also connects the double-dividend issue with principles of optimal environmental taxation in a second-best setting.A weak double-dividend claim-that returning tax revenues through cuts in distortionary taxes leads to cost savings relative to the case where revenues are returned lump sum-is easily defended on theoretical grounds and (thankfully) receives wide support from numerical simulations. The stronger versions contend that revenueneutral swaps of environmental taxes for ordinary distortionary taxes involve zero or negative gross costs. Theoretical analyses and numerical results tend to cast doubt on the strong double-dividend claim, although the theoretical case is not air-tight and the numerical evidence is mixed.

Are We Consuming Too Much

This paper articulates and applies frameworks for examining whether consumption is excessive. We consider two criteria for the possible excessiveness (or insufficiency) of current consumption. One is an intertemporal utility-maximization criterion: actual current consumption is deemed excessive if it is higher than the level of current consumption on the consumption path that maximizes the present discounted value of utility. The other is a sustainability criterion, which requires that current consumption be consistent with non-declining living standards over time. We extend previous theoretical approaches by offering a formula for the sustainability criterion that accounts for population growth and technological change. In applying this formula, we find that some poor regions of the world are failing to meet the sustainability criterion: in these regions, genuine wealth per capita is falling as investments in human and manufactured capital are not sufficient to offset the depletion of natural capital.

The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting

This paper uses analytical and numerical general equilibrium models to study the costs of achieving pollution reductions under a range of environmental policy instruments in a second-best setting with pre-existing factor taxes. We compare the costs and efficiency impacts of emissions taxes, emissions quotas, fuels taxes, performance standards, and mandated technologies, and explore how costs change with the magnitude of pre-existing taxes and the extent of pollution abatement. We find that the presence of distortionary taxes raises the costs of pollution abatement under each instrument relative to its costs in a first-best world. This extra cost is an increasing function of the magnitude of pre-existing tax rates. For plausible values of pre-existing tax rates and other parameters, the cost increase for all policies is substantial (35 % or more). The impact of pre-existing taxes is large for non-auctioned emissions quotas, the cost increase can be several hundred percent. Earlier work on instrument choice emphasized the potential reduction in compliance cost from converting fixed emissions quotas into tradeable emissions permits. Our results show the regulators decision to auction or grandfather emissions rights can have important cost impacts. Similarly, the choice of how to recycle revenues from environmentally motivated taxes can be as important to cost as whether the tax takes the form of an emissions tax or fuel tax, particularly when modest emissions reductions are involved. In both first- and second-best settings, the cost differences across instruments depend on the extent of pollution abatement under consideration. Total abatement costs differ markedly at low levels of abatement. Strikingly, for all instruments except the fuel tax these costs converge to the same value as abatement levels approach 100 percent.

Induced technological change and the attractiveness of CO2 abatement policies

Abstract This paper investigates the significance of induced technological change (ITC) for the attractiveness of CO2 abatement policies. We use analytical and numerical general equilibrium models in which technological change results from profit-maximizing investments in R&D. We show that carbon abatement policies have very different impacts on R&D across industries, and do not necessarily raise the economy-wide rate of technological progress. Focusing only on the sectors with positive R&D impacts can lead to substantial underassessment of the GDP costs of CO2 abatement policies. The presence of ITC implies lower costs of achieving a given abatement target, but it implies higher gross costs (costs before netting out environment-related benefits) of a given carbon tax. Gross costs depend importantly on the efficiency of R&D markets prior to the introduction of CO2 policies.

When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets

Abstract This paper employs analytical and numerical models to assess the welfare effects of a revenue-neutral carbon tax and (nonauctioned) carbon emissions permits, taking into account preexisting tax distortions in factor markets. The presence of preexisting taxes significantly raises the general equilibrium costs of both policies. This cost increase is much greater under emissions permits, since this policy does not generate revenues to reduce distortionary taxes. Under our central estimates emissions permits cannot increase welfare unless environmental damages exceed about

Instrument Choice in Environmental Policy

18 per ton of carbon. In contrast, an appropriately scaled carbon tax is welfare-improving so long as environmental damages are positive.

Tax Policy, Asset Prices, and Growth: a General Equilibrium Analysis

We examine the extent to which various environmental policy instruments meet major evaluation criteria, including cost-effectiveness, distributional equity, minimization of risk in the presence of uncertainty, and political feasibility. Instruments considered include emissions taxes, tradable emissions allowances, subsidies for emissions reductions, performance standards, technology mandates, and research and development subsidies. Several themes emerge. First, no single instrument is clearly superior along all the criteria. Second, significant trade-offs arise in the choice of instrument; for example, assuring a reasonable degree of distributional equity often will require a sacrifice of cost-effectiveness. Third, it is possible and sometimes desirable to design hybrid instruments that combine features of various instruments in their “pure” form. Fourth, for many pollution problems, more than one market failure may be involved, which may justify (on efficiency grounds, at least) employing more than one instrument. Finally, potential overlaps and undesirable interactions among environmental policy instruments are sometimes a matter of concern.

Achieving low-cost emissions targets

This paper presents a multisector general equilibrium model that is capable of providing integrated assessments of the economys short- and long- run responses to tax policy changes. The model contains an explicit treatment of firms investment decisions according to which producers exhibit forward- looking behavior and take account of adjustment costs inherent in the installation of new capital. This permits an examination of both short-run effects of tax policy on industry profits and asset prices as well as 1ong-term effects on capital accumulation. The model contains considerable detail on U.S. industry, corporate financial policies, and the U.S. tax system. Simulation results reveal that the effects of tax policy differ significantly depending on whether the policy is oriented toward new or old capital measures like the investment tax credit stimulate investment without conferring significant windfall gains on corporate shareholders. Corporate tax rate reductions with the same revenue cost, on the other hand, yield large windfalls to shareholders while providing only a modest stimulus to investment in plant and equipment.

The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution

There has been much discussion about ways to reduce the rate of atmospheric accumulation of carbon dioxide and other greenhouse gases. What are the key economic and policy issues concerning the timing of such efforts?

Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program

We show that under typical conditions the simple “excess‐burden triangle” formula substantially underestimates the excess burden of commodity taxes, in some cases by a factor of 10 or more. This formula performs poorly because it ignores general equilibrium interactions—most important, interactions between the taxed commodity and the labor market. Many prior studies have shown that general equilibrium interactions affect excess burden but have not appreciated the bias associated with ignoring these interactions or the quantitative importance of this bias. We derive an implementable alternative to the simple formula. This alternative formula captures interactions that the simple formula omits; as a result it is both unbiased and usually more accurate.