Social and Behavioral Sciences Commons^™

Integrated Assessment Models And The Social Cost Of Carbon: A Review And Assessment, Gilbert E. Metcalf, James Stock

Gilbert E. Metcalf

A Conceptual Framework For Measuring The Effectiveness Of Green Fiscal Reforms, Gilbert E. Metcalf

Gilbert E. Metcalf

Senate Finance Committee Testimony On Energy Tax Reform, Gilbert E. Metcalf

Gilbert E. Metcalf

Testimony presented to the full Committee at a hearing held on September 17, 2014.

Cursed Resources? Political Conditions And Oil Market Outcomes, Gilbert E. Metcalf, Catherine Wolfram

Gilbert E. Metcalf

We analyze how a country’s political institutions affect oil production within its borders. We find a pronounced negative relationship between political openness and volatility in oil production, with democratic regimes exhibiting less volatility than more autocratic regimes. This relationship holds across a number of robustness checks including using different measures of political conditions, instrumenting for political conditions and using several measures of production volatility. Political openness also affects other oil market outcomes, including total production as a share of reserves. Our findings have implications both for interpreting the role of institutions in explaining differences in macroeconomic development and for understanding …

Does The Indexing Of Government Transfers Make Carbon Pricing Progressive?, Don Fullerton, Garth Heutel, Gilbert E. Metcalf

Gilbert E. Metcalf

We consider the role of transfer indexing in mitigating the regressivity of carbon pricing in an annual and lifetime income context.

Linking Policies When Tastes Differ: Global Climate Policy In A Heterogeneous World, Gilbert E. Metcalf, David Weisbach

Gilbert E. Metcalf

We discuss the mechanics of linking different types of climate change policies and identify areas where linkage will be difficult.

Distributional Impacts Of Carbon Pricing: A General Equilibrium Approach With Micro-Data For Households, Sebastian Rausch, Gilbert E. Metcalf, John Reilly

Gilbert E. Metcalf

Many policies to limit greenhouse gas emissions have at their core efforts to put a price on carbon emissions. Carbon pricing impacts households both by raising the cost of carbon intensive products and by changing factor prices. A complete analysis requires taking both effects into account. The impact of carbon pricing is determined by heterogeneity in household spending patterns across income groups as well as heterogeneity in factor income patterns across income groups. It is also affected by precise formulation of the policy (how is the revenue from carbon pricing distributed) as well as the treatment of other government policies …

Assessing The Federal Deduction For State And Local Tax Payments, Gilbert E. Metcalf

Gilbert E. Metcalf

This paper examines the distributional and behavioral impacts of ending the deductibility of state and local taxes against the federal individual income tax. I carry out a number of distributional analyses — considering both variation across income and across states — of the subsidy from deductibility as well as the distributional impact of potential partial reforms. I also consider how behavioral responses affect the distributional analysis. Using a large panel of data on state and local governments, I find that deductibility increases reliance on deductible taxes and increases state and local spending out of own-source revenue.

Paying For Greenhouse Gas Reductions: What Role For Fairness?, Gilbert E. Metcalf

Gilbert E. Metcalf

Several authors have made different claims regarding the property rights associated with the atmosphere. This discussion is essentially one of fairness and asset ownership. Indirectly, it gets at the question of who

should bear the burden of policies to reduce greenhouse gas emissions. While reviewing various ownership claims, this Essay argues that economics cannot adjudicate among competing claims to the atmosphere. What economics can do is improve our understanding of the economic burdens arising from climate change legislation. In particular, this Essay considers the distributional impacts of carbon pricing as a means to reduce greenhouse gas emissions.

This Essay makes …

Submission On The Use Of Carbon Fees To Achieve Fiscal Sustainability In The Federal Budget, Gilbert E. Metcalf

Gilbert E. Metcalf

The National Commission on Fiscal Responsibility and Reform should consider a carbon fee as an instrument to enhance the federal budget's fiscal sustainability. A carbon fee would provide significant environmental and efficiency benefits for the U.S. economy in comparison to alternative revenue raising tools available to the federal government. A carbon fee is a predictable source of revenue that could substantially contribute to reducing the federal debt. A carbon charge that begins in the neighborhood of $30 per ton of carbon dioxide equivalent (nominal dollars) could raise revenue between 2015 and 2050 that in present value terms equals roughly 40 …

Tax Policies For Low-Carbon Technologies, Gilbert E. Metcalf

Gilbert E. Metcalf

The following paper discusses the difficulties of achieving climate change policy goals with low-carbon subsidies as opposed to using taxes to raise the price of carbon intensive activities. First, subsidies lower the cost of energy, and thus, encourage consumer demand responses that work in opposition to the goal of reducing emissions. Second, it is difficult to achieve technology neutrality with subsidies. Third, many subsidies are inframarginal. Finally, subsidies often suffer from unintended interactions with other policies. The paper concludes with some observations on the use of price-based instruments and discusses how a carbon tax could be designed to achieve environmental …

Investment In Energy Infrastructure And The Tax Code, Gilbert E. Metcalf

Gilbert E. Metcalf

Federal tax policy provides a broad array of incentives for energy investment. I review those policies and construct estimates of marginal effective tax rates for different energy capital investments as of 2007. Effective tax rates vary widely across investment classes. I then consider investment in wind generation capital and regress investment against a user cost of capital measure along with other controls. I find that wind investment is strongly responsive to changes in tax policy. Based on the coefficient estimates the elasticity of investment with respect to the user cost of capital is in the range of -1 to -2. …

Market-Based Policy Options To Control U.S. Greenhouse Gas Emissions, Gilbert E. Metcalf

Gilbert E. Metcalf

The United States is moving closer to enacting a policy to reduce domestic emissions of greenhouse gases. A key element in any plan to reduce emissions will be to place a price on greenhouse gas emissions. This paper discusses the different approaches that can be taken to price emissions and assesses their strengths and weaknesses.

Cost Containment In Climate Change Policy: Alternative Approaches To Mitigating Price Volatility, Gilbert E. Metcalf

Gilbert E. Metcalf

Cap and trade systems are emerging as the front-running policy choice to address climate change concerns in many countries. One of the apparent attractions of this approach is the ability to achieve hard limits on emissions over a control period. The cost of achieving this certainty on emission limits is price volatility. I discuss and evaluate various approaches within cap and trade systems to reduce price volatility. A fundamental trade-off exists between certainty of emission limits and price volatility. A pure carbon tax sacrifices certainty of emission limits in favor of price stability. I discuss how a hybrid carbon tax …

Energy Tax Incentives And The Alternative Minimum Tax, Curtis Carlson, Gilbert E. Metcalf

Gilbert E. Metcalf

We take a first look at limitations on the use of energy-related tax credits contained in the General Business Credit (GBC) due to limitations within the regular corporate income tax as well as the AMT. Between 2000 and 2005, firms were unable to use all energy-related tax credits due to GBC limitations in the regular tax. The AMT has a smaller but still pronounced impact on the ability of firms to use these credits. Finally we provide some illustrative calculations to demonstrate how the AMT can lead to very different levelized costs of producing electricity from a wind power project.

Using Tax Expenditures To Achieve Energy Policy Goals, Gilbert E. Metcalf

Gilbert E. Metcalf

Tax expenditures are a major source of support for energy related activities in the federal budget exceeding direct budget support for energy by a factor of nearly six. Focusing on the policy goals of reducing greenhouse gas emissions and petroleum consumption, I find these tax expenditures highly cost ineffective at best and counterproductive at worse. The tax credit for ethanol is an example of a cost ineffective subsidy. The cost of reducing CO2 emissions through this subsidy exceeded $1,000 per ton of CO2 avoided in 2006. A change in the way the subsidy is administered provides an opportunity to measure …

An Empirical Analysis Of Energy Intensity And Its Determinants At The State Level,", Gilbert E. Metcalf

Gilbert E. Metcalf

Aggregate energy intensity in the United States has been declining steadily since the mid-1970s and the first oil shock. Energy intensity can be reduced by improving efficiency in the use of energy or by moving away from energy-intensive activities. At the national level, I show that roughly three-quarters of the improvements in U.S. energy intensity since 1970 results from efficiency improvements. This should reduce concerns that the United States is off-shoring its carbon emissions. A state-level analysis shows that rising per capita income and higher energy prices have played an important part in lowering energy intensity. Price and income predominantly …

Federal Tax Policy Towards Energy, Gilbert E. Metcalf

Gilbert E. Metcalf

On Aug. 8, 2005, President Bush signed the Energy Policy Act of 2005 (PL 109-58). This was the first major piece of energy legislation enacted since 1992 following five years of Congressional efforts to pass energy legislation. Among other things, the law contains tax incentives worth over $14 billion between 2005 and 2015. These incentives represent both pre-existing initiatives that the law extends as well as new initiatives.

In this paper I survey federal tax energy policy focusing both on programs that affect energy supply and demand. I briefly discuss the distributional and incentive impacts of many of these incentives. …

A Comment On The Role Of Prices For Excludable Public Goods (With Jongsang Park)., Gilbert E. Metcalf

Gilbert E. Metcalf

Blomquist and Christensen [(2005). The role of prices for excludable public goods, International Tax and Public Finance, 12 ,61-79] argue that welfare is initially decreasing in the price of an excludable public good and that the case for a positive price for an excludable public good price is weak. We argue that this result follows from their particular characterization of the public good and that an alternative and equally reasonable characterization overturns their result. Hence, the policy case for a positive price on the public good is stronger than Blomquist and Christiansen suggest.

Tax Distortions And Global Climate Policy (With Mustafa Babiker And John Reilly)., Gilbert E. Metcalf

Gilbert E. Metcalf

We consider the efficiency implications of policies to reduce global carbon emissions in a world with pre-existing tax distortions. We first note that the weak double dividend, the proposition that the welfare improvement from a tax reform where environmental taxes are used to lower distorting taxes must be greater than the welfare improvement from a reform where the environmental taxes are returned in a lump sum fashion, need not hold in a world with multiple distortions. We then present a large-scale computable general equilibrium model of the world economy with distortionary taxation. We use this model to evaluate a number …

Environmental Levies And Distortionary Taxation: Pigou, Taxation, And Pollution, Gilbert E. Metcalf

Gilbert E. Metcalf

I note an important distinction between the optimal price of environmental quality in a second-best world and the optimal level of environmental quality. Using an analytical general equilibrium model, I show that for reasonable parameter values, an increase in tax distortions (arising from an increase in required tax revenues) leads to a fall in the optimal Pigouvian tax rate even while environmental quality improves. In general, knowledge of the direction of changes in optimal environmental tax rates due to changes in the economy is not sufficient for understanding the impact on environmental quality.

A Tax On Output Of The Polluting Industry Is Not A Tax On Pollution: The Importance Of Hitting The Target, Gilbert E. Metcalf

Gilbert E. Metcalf

No abstract provided.

Measuring The Energy Savings From Home Improvement Investments: Evidence From Monthly Billing Data, Gilbert E. Metcalf, Kevin A. Hassett

Gilbert E. Metcalf

An important factor driving energy policy over the past two decades has been the "energy paradox," the perception that consumers apply unreasonably high hurdle rates to energy-saving investments. We explore one possible explanation for this apparent puzzle: that realized returns fall short of the returns promised by engineers and product manufacturers. Using a unique data set, we find that the realized return to attic insulation is statistically significant, but the median estimate (9.7%) is almost identical to a discount rate for this investment implied by a CAPM analysis. We conclude that the case for the energy paradox is weaker than …

Investment With Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?, Gilbert E. Metcalf, Kevin A. Hassett

Gilbert E. Metcalf

The authors consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behavior when uncertainty is due to a shock following geometric Brownian motion (GBM) versus when random discrete jumps in tax policy occur. Expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty. Aggregate investment simulations indicate that capital formation is adversely affected by increases in uncertainty in the traditional GBM model but can be enhanced in the jump …

A Distributional Analysis Of Green Tax Reforms, Gilbert E. Metcalf

Gilbert E. Metcalf

I measure the distributional impact of a shift toward greater reliance on environmental taxes (a green tax reform) using both annual and lifetime income measures to rank households. An environmental tax reform can be designed that has a negligible impact on the income distribution when the funds are rebated to households through reductions in the payroll tax and personal income tax. I also analyze trade-offs among competing goals of efficiency, equity, and ease of administration in the design of a green tax reform.

Specification Testing In Panel Data With Instrumental Variables, Gilbert E. Metcalf

Gilbert E. Metcalf

I show that specification tests for correlated fixed effects developed by Hausman and Taylor extend in an analogous way to panel data sets with endogenous regressors. Given panel data, different sets of instrumental variables can be used to construct the test. For a simple class of models, the test in many cases is asymptotically more efficient if an incomplete set of instruments is used. However, in small samples one may do better using the complete set of instruments. Monte Carlo results demonstrate the likely gains for different assumptions about the degree of between and within variance in the data.

Can Irreversibility Explain The Slow Diffusion Of Energy Saving Technologies? (With Kevin Hassett), Gilbert E. Metcalf

Gilbert E. Metcalf

A model was developed on the effects of irreversibility on home improvement behavior. It is also considered whether it may be helpful in shedding light on the slow diffusion of new energy technologies. This work has been criticized for being of little value in studying the high discount rates applied by consumers to home-improvement purchases. It is proven that the model can generate predicted hurdle rates as high as those estimated in the literature, and thus solve the energy paradox.

Specification Testing In Panel Data With Instrumental Variables, Gilbert E. Metcalf

Gilbert E. Metcalf

I show that specification tests for correlated fixed effects developed by Hausman and Taylor extend in an analogous way to panel data sets with endogenous regressors. Given panel data, different sets of instrumental variables can be used to construct the test. For a simple class of models, the test in many cases is asymptotically more efficient if an incomplete set of instruments is used. However, in small samples one may do better using the complete set of instruments. Monte Carlo results demonstrate the likely gains for different assumptions about the degree of between and within variance in the data.

Energy Tax Credits And Residential Conservation Investment: Evidence From Panel Data (With Kevin Hassett), Gilbert E. Metcalf

Gilbert E. Metcalf

Using panel data on individual tax returns and variation in state tax policy, we measure the impact of government tax policies to encourage residential conservation investment on the probability of making these investments. Unlike previous work, we account for unobserved heterogeneity in tastes for energy-saving activities and its possible correlation with tax policy at the state level. We find that controlling for unobserved heterogeneity is very important. Based on our preferred point estimate of the tax price coefficient, a 10 percentage point change in the tax price for energy investment would lead to a 24 percent increase in the probability …

The 'New' View Of Investment Decisions And Public Policy Analysis: An Application To Green Lights And Cold Refrigerators, Gilbert E. Metcalf, Donald Rosenthal

Gilbert E. Metcalf

Recent research in investment theory emphasizes the importance of sunk investment costs, uncertainty in returns, and flexibility in investment timing. Allowing for the presence of these characteristics alters traditional discounted cash flow rules for when to invest. Those rules will recommend investing at lower rate-of-return thresholds than is optimal. This article describes this research and suggests the range of potential situations to which the theory applies. It also discusses the implications for policy analysis and suggests that government programs to encourage investment may, in some cases, be inappropriate. After discussing a wide array of possible applications, we focus on one …