Macroeconomic
Effects of Alternative Implementation Instruments
All
the cases considered assume a marketable emission permit system,
with a no-cost allocation of the permits based on historical emissions.
In meeting the targets, power suppliers are free to buy and sell
allowances at a market-determined price for the permits, which represents
the marginal cost of abatement of any given emission. An alternative
form of permit system would auction the permits to power suppliers.
The price paid for the auctioned permits would equal the price paid
for traded permits under the no-cost allocation system used for
this study. However, the two systems imply a different distribution
of income.
In the no-cost allocation system, there would be a redistribution
of income flows between power suppliers in the form of purchases
of emission permits. There would be no net burden on the power suppliers
as a whole, only a transfer of funds among firms. While all firms
are expected to benefit from trading, the burden would vary among
firms. With a Federal auction system, in contrast, there would be
a net transfer of income from power suppliers to the Federal government.
The key question at this juncture turns on the use of the funds
by the Federal government. If the funds were returned to the power
suppliers, the effect would be the same as in the no-cost allocation
scheme, but with the Federal government establishing the permit
market mechanism. Another use of the funds might be to return them
to consumers either in the form of a lump-sum transfer or in the
form of a personal income tax cut, compensating consumers for the
higher prices paid for energy and non-energy goods and services.a
Relative to the no-cost allocation of permits, an auction that transfers
funds to consumers in a lump sum would help to maintain their level
of overall consumption. With the transfer, however, total investment
would decline relative to the allocation system. The two effects
would tend to counterbalance each other, but not completely. Returning
collected auction funds to the consumer would tend to have a slightly
more positive effect than the negative effect on investment for
the first few years, but investment would tend to rebound faster
and contribute increasingly to the recovery. As a result, real GDP
would be expected to recover to reference case levels faster under
the no-cost allocation system. Over the entire period, however,
the net impacts on real GDP are expected to be similar in both magnitude
and pattern under the two potential allocation schemes.
Another approach is to recycle the auctioned revenues to either
consumers or businesses through a reduction in marginal tax rates
on capital or labor. Unlike the no-cost allocation or the lump-sum
payment to consumers, this approach may lower the aggregate cost
to the economy by shifting the tax burden away from distortionary
taxes on labor and capital toward the taxation of an environmental
pollutant. Most often research on this topic is based on a general
equilibrium approach, where all factors are assumed to be utilized
fully, as in the work by Goulder, Parry, and Burtraw.b Revenue recycling benefits may also apply in a setting where transition
effects on the economy, such as considered in the current EIA study,
are the focus.c
aFor a discussion of the relative merits of alternative instruments,
see Perman, Ma, and McGilvray, Pollution Control Policy,
in Natural Resource and Environmental Economics (Addison
Wesley Longman, 1996).
bL.H. Goulder, I.W.H Parry, and D. Burtraw, Revenue-Raising
Versus Other Approaches to Environmental Protection: The Critical
Significance of Pre-existing Tax Distortions, RAND Journal
of Economics, Vol. 28. (Winter 1997), pp. 708-731.
cSee also Energy Information Administration (EIA), Impacts of
the Kyoto Protocol on U.S. Energy Markets and Economic Activity,
SR/OIAF/98-03 (Washington, DC, October 1998), Chapter 6, Assessment
of Economic Impacts and EIA, Analysis of Strategies for
Reducing Multiple Emissions from Electric Power Plants: Sulfur Dioxide,
Nitrogen Oxides, Carbon Dioxide, and Mercury and a Renewable Portfolio
Standard, SR/OIAF/2001-03 (Washington, DC, July 2001), Chapter
4, Fuel Market and Macroeconomic Impacts.
|