Social and Behavioral Sciences Commons^™

Multiple Pollutants, Co-Benefits, And Suboptimal Environmental Policies, Don Fullerton, Daniel Karney

Don Fullerton

A Model To Evaluate Vehicle Emission Incentive Policies In Japan, Don Fullerton, Li Gan, Miwa Hattori

Don Fullerton

Using 3 years of data from the 47 prefectures of Japan, we estimate the behavior of households that simultaneously make discrete decisions about vehicle ownership and continuous decisions about driving distance. We use the estimated parameters to calculate elasticities and to simulate the effects of alternative pollution control policies such as taxes on gasoline, distance, or particular cars. Given choices about cars and distance, we also calculate emissions. Since we model simultaneous choices, both the chosen distance and the chosen car can be affected either by a tax on distance or by a tax on car characteristics. We find expected …

Negative Leakage, Kathy Baylis, Don Fullerton, Daniel Karney

Don Fullerton

Our analytical general equilibrium model solves for effects of a small increase in carbon tax on leakage – the increase in emissions elsewhere. Identical consumers buy two goods using income from endowments that are mobile between sectors. Usually an increase in one sector’s tax raises output price, so consumption shifts to the other good, causing positive leakage. Here, we find a new negative effect not recognized in existing literature: the taxed sector substitutes away from carbon into clean inputs, so it may absorb resources, shrink the other sector, and reduce their emissions. This “abatement resource effect” can offset most or …

Can A Unilateral Carbon Tax Reduce Emissions Elsewhere?, Joshua Elliott, Don Fullerton

Don Fullerton

One country or sector that tries to reduce greenhouse gas emissions may fear that other countries or sectors will get a competitive advantage and increase emissions. Computable general equilibrium (CGE) models such as Elliott et al (2010a,b) indicate that 15% to 25% of abatement might be offset by this “leakage.” Yet the Fullerton et al (2012) simple two-sector analytical general equilibrium model shows an offsetting term with negative leakage. In this paper, we use a full CGE model with many countries and many goods to measure effects in a way that allows for this negative leakage term. We vary elasticities …

Social, Economic, And Ethical Concepts And Methods, Charles Kolstad, Kevin Urama, Don Fullerton, Et Al

Don Fullerton

This framing chapter describes the strengths and limitations of the most widely used concepts and methods in economics, ethics, and other social sciences that are relevant to climate change. It also provides a reference resource for the other chapters in the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5), as well as for decision makers.

Vehicle Choices, Miles Driven, And Pollution Policies, Ye Feng, Don Fullerton, Li Gan

Don Fullerton

Mobile sources contribute large percentages of each pollutant, but technology is not yet available to measure and tax emissions from each vehicle. We build a behavioral model of household choices about vehicles and miles traveled. The ideal-but-unavailable emissions tax would encourage drivers to abate emissions through many behaviors, some of which involve market transactions that can be observed for feasible market incentives (such as a gas tax, subsidy to new cars, or tax by vehicle type). Our model can calculate behavioral effects of each such price and thus calculate car choices, miles, and emissions. A nested logit structure is used …

Leakage, Welfare, And Cost-Effectiveness Of Carbon Policy, Kathy Baylis, Don Fullerton, Daniel H. Karney

Don Fullerton

We extend the model of Fullerton et al (2012) to explore cost-effectiveness of unilateral climate policy in the presence of leakage. We ignore the welfare gain from reducing greenhouse gas emissions and focus on the welfare cost of the emissions tax or permit scheme. Whereas that prior paper solves for changes in emissions quantities and finds that leakage maybe negative, we show here that all cases with negative leakage in that model are cases where a unilateral carbon tax results in a welfare loss. With positive leakage, however, a unilateral policy can improve welfare.

Can Pollution Tax Rebates Protect Low-Wage Earners?, Don Fullerton, Holly Monti

Don Fullerton

Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some proposals offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both high-skilled and low-skilled labor, and we solve for the change in real net wage of each group. A decomposition shows the separate effects of the tax rebate, higher product prices, and the changes in relative wage rates. We also include numerical examples. Even though the pollution tax injures both types of labor, in most cases we find …

Introduction, Don Fullerton, Mark Cohen, Robert Topel

Don Fullerton

We introduce and summarize the ten chapters of the 2013 book we edited called "Distributional Aspects of Energy and Climate Policies". In particular, the chapters examine policies that would “price” carbon emissions or otherwise seek to mitigate anthropogenic climate change. We interpret “distributional” fairly broadly, to include impacts of pending or possible legislation on the living standards of households across the U.S. income distribution and across geographic areas, as well as international differences in the costs and benefits of climate policies that would affect countries’ willingness to participate in harmonized international agreements.

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

Don Fullerton

We analyze both the uses side and the sources side incidence of domestic climate policy using an analytical general equilibrium model, taking into account the degree of government program indexing. When transfer programs such as Social Security are explicitly indexed to inflation, higher energy prices automatically lead to cost-of-living adjustments for recipients. We show results with no indexing, 100 percent indexing, and partial indexing based on our analysis of actual transfer programs. When households are classified by annual income, the indexing of U.S. transfers is not enough to offset the regressive uses side, but when they are classified by annual …

The Design And Implementation Of U.S. Climate Policy, Don Fullerton, Catherine Wolfram

Don Fullerton

No abstract provided.

Introduction And Summary, Don Fullerton, Catherine Wolfram

Don Fullerton

While economic models have already proven useful to analyze big picture questions about climate policy such as the choice between a carbon tax or cap-and-trade permit system, the 19 chapters in this book show how economic models also are useful to address the many remaining smaller questions that arise as policy is implemented. For example, chapters consider: the tradeoffs policymakers confront in deciding whether to implement the policy upstream on energy producers or downstream on energy users; how to monitor and enforce climate policy; how Federal actions might interact with climate policies at other levels of government or with other …

The Progressivity Of Social Security, Julia Lynn Coronado, Don Fullerton, Thomas Glass

Don Fullerton

How much does the current social security system redistribute from rich to poor? We propose alternative concepts of well-being that can be used to classify individuals from rich to poor, and we show how social security redistributes differently under each concept. We use the PSID to estimate lifetime wage profiles and actual earnings each year for a sample of 1778 individuals, and we use mortality probabilities to calculate expected payroll taxes and social security benefits. For a given set of “facts” about the net flows experienced each year by each individual, measured progressivity depends on many assumptions. This paper attempts …

Six Distributional Effects Of Environmental Policy, Don Fullerton

Don Fullerton

While prior literature has identified various effects of environmental policy, this note uses the example of a proposed carbon permit system to illustrate and discuss six different types of distributional effects: (1) higher prices of carbon-intensive products, (2) changes in relative returns to factors like labor, capital, and resources, (3) allocation of scarcity rents from a restricted number of permits, (4) distribution of the benefits from improvements in environmental quality, (5) temporary effects during the transition, and (6) capitalization of all those effects into prices of land, corporate stock, or house values. The note also discusses whether all six effects …

Optimal Taxation Of Externalities Interacting Through Markets: A Theoretical General Equilibrium Analysis, Xiaolin Ren, Don Fullerton, John Braden

Don Fullerton

This study develops a theoretical general equilibrium model to examine optimal externality tax policy in the presence of externalities linked to one another through markets rather than technical production relationships. Analytical results reveal that the second-best externality tax rate may be greater or less than the first-best rate, depending largely on the elasticity of substitution between the two externality-generating products. These results are explored empirically for the case of greenhouse gas from fossil fuel and nitrogen emissions associated with biofuels.

The General Equilibrium Incidence Of Environmental Mandates, Don Fullerton, Garth Heutel

Don Fullerton

Pollution regulations affect factor demands, relative returns, production, and output prices. In our model, one sector includes pollution as an input that can be a complement or substitute for labor or capital. For each type of mandate, we find conditions where more burden is on labor or on capital. Stricter regulation does not always place less burden on the better substitute for pollution. Also, restrictions on pollution per unit output create an “output-subsidy effect” on factor prices that can reverse the usual output and substitution effects. We find analogous effects for a restriction on pollution per unit capital.

Tax And Subsidy Combinations For The Control Of Car Pollution, Don Fullerton, Sarah West

Don Fullerton

Despite technological advances, an individual car’s emissions still cannot be measured reliably enough to impose a Pigovian tax. This paper explores alternative market incentives that could be used instead. We solve for second-best combinations of uniform taxes on gasoline, engine size, and vehicle age. For 1,261 individuals and cars in the 1994 Consumer Expenditure Survey, we record the car’s model, year, and number of cylinders. We then seek a corresponding car in data from the California Air Resources Board that shows the car’s engine size, fuel efficiency, and emissions per mile. We calculate the welfare improvement from a zero-tax scenario …

Combinations Of Instruments To Achieve Low-Carbon Vehicle-Miles, Don Fullerton, Daniel Karney

Don Fullerton

In cases where the first-best carbon tax and a reasonable second-best gasoline tax are unavailable, this paper demonstrates how alternative combinations of instruments can form economically-sound, environmentally-motivated policies for substantial reductions in vehicle carbon emissions. In order to implement alternative approaches successfully, our point is that policymakers may need to take a holistic approach when designing policy. This holistic approach would recognise that policies to reduce carbon emissions must be politically feasible, and that all sectors of the economy generate carbon emissions. A holistic approach would not focus just on one method of abatement, like encouraging low-carbon vehicle technologies, but …

Analytical General Equilibrium Effects Of Energy Policy On Output And Factor Prices, Don Fullerton, Garth Heutel

Don Fullerton

Using an analytical general equilibrium model, we find solutions for the effect of energy policy on factor prices as well as output prices. We calibrate the model to the U.S. economy, and we consider a tax on carbon dioxide. By looking at expenditure and income patterns across household groups, we quantify the uses-side and sources-side incidence of the tax. When households are categorized either by annual income or by total annual consumption as a proxy for permanent income, the uses-side incidence is regressive. This result is robust to sensitivity analysis over various parameter values. The sources-side incidence can be progressive, …

Environmental Taxes, Don Fullerton, Andrew Leicester, Stephen Smith

Don Fullerton

This paper provides an overview of key economic issues in the use of taxation as an instrument of environmental policy. Part A reviews economic arguments for using taxes and other market mechanisms in environmental policy, discusses the choice between taxes directly on measured emissions or less-directly related to emissions, and considers the value of the revenue from environmental taxes. We argue that environmental tax revenues do not significantly alter economic constraints on tax policy, and that environmental taxes need to be designed and justified primarily by the cost-effective achievement of environmental goals. Part B discusses key areas where environmental taxes …

The Allocation Of Permits In U.S. Climate Change Legislation, Don Fullerton, Daniel Karney

Don Fullerton

Don Fullerton and Daniel Karney of the University of Illinois take a hard look at the allocation of CO2 emissions permits under the Waxman-Markey bill and give it minimally passing marks.

Distributional Effects Of Environmental And Energy Policy: An Introduction, Don Fullerton

Don Fullerton

This chapter reviews literature on the distributional effects of environmental and energy policy. In particular, many effects of such policy are likely regressive. First, it raises the price of fossil-fuel-intensive products, expenditures on which are a high fraction of low-income budgets. Second, if abatement technologies are capital-intensive, then any mandate to abate pollution may induce firms to use more capital. If demand for capital is raised relative to labor, then a lower relative wage may also hurt low-income households. Third, pollution permits handed out to firms bestow scarcity rents on well-off individuals who own those firms. Fourth, low-income individuals may …

Is Social Security Part Of The Social Safety Net?, Jeffrey R. Brown, Julia Lynn Coronado, Don Fullerton

Don Fullerton

Building on the existing literature that examines the extent of redistribution in the Social Security system as a whole, this paper focuses more specifically on how Social Security affects the poor. This question is important because a Social Security program that reduces overall inequality by redistributing from high income individuals to middle income individuals may do nothing to help the poor; conversely, a program that redistributes to the poor may nonetheless be regressive according to broader measures if it also redistributes from middle to upper income households. We have four major findings. First, as we expand the definition of income …

Environmental Investment And Policy With Distortionary Taxes And Endogenous Growth, Don Fullerton, Seung Rae Kim

Don Fullerton

Recent studies consider public R&D spending that affects abatement knowledge and endogenous growth, distortionary taxes that affect physical and human capital formation, pollution taxes that affect environmental degradation, and regeneration that restores natural capital. Our model combines all of those elements. We show how the combination affects results from each prior model, focusing on two parameters that represent the need for distorting taxes, and the productivity of abatement knowledge relative to pollution. First, these two extensions can reverse the prior finding that pollution tax revenue is more than enough to pay for public abatement R&D. Second, tax distortions and externalities …

The General Equilibrium Incidence Of Environmental Taxes, Don Fullerton, Garth Heutel

Don Fullerton

We study the distributional effects of a pollution tax in general equilibrium, with general forms of substitution where pollution might be a relative complement or substitute for labor or for capital in production. We find closed form solutions for pollution, output prices, and factor prices. Various special cases help clarify the impact of differential factor intensities, substitution effects, and output effects. Intuitively, the pollution tax might place disproportionate burdens on capital if the polluting sector is capital intensive, or if labor is a better substitute for pollution than is capital; however, conditions are found where these intuitive results do not …

The Many Definitions Of Social Security Privatization, Don Fullerton, Michael Geruso

Don Fullerton

Definitions can matter, and Don Fullerton and Michael Geruso argue that proponents of social security privatization mean a host of different things by "privatization." They point out that many of the gains from privatization seen by economists like Martin Feldstein and Laurence Kotlikoff owe to only a few aspects of privatization.

The Economics Of Pollution Havens, Don Fullerton

Don Fullerton

A "pollution haven" may arise if environmental regulations differ between countries, if capital is mobile, and if trade rules allow firms to relocate and still sell their products to the same customers. The three appearances of the word "if" in that sentence suggest a whole host of theoretical and empirical questions under the general heading of "pollution havens," and many such questions have been addressed in the economics literature in the past ten years since Brian Copeland and M. Scott Taylor introduced the first complete model of pollution havens (Quarterly Journal of Economics, 1994). To categorize those questions, they later …

The Two-Part Instrument In A Second-Best World, Don Fullerton, Ann Wolverton

Don Fullerton

Standard Pigovian tax theory has been extended in two directions. First, many polluting activities are difficult to tax because they are not market transactions, and so recent papers have shown that the same effects can be achieved by use of a two-part instrument (2PI): a tax on output or income and a subsidy for clean alternatives to pollution. It is a generalization of a deposit-refund system. Second, a different literature concerns the second-best pollution tax in the presence of other tax distortions. Here, we combine the two extensions by looking at the second-best 2PI. When government needs revenue, is the …

Cost-Effective Policies To Reduce Vehicle Emissions, Don Fullerton, Li Gan

Don Fullerton

This paper uses an estimated demand system that accounts for heterogeneity to calculate and compare the lost consumer surplus from a higher tax on gasoline, a tax on distance, or a subsidy for buying a newer car. We introduce a view of cost-effectiveness that compares policies instead of technologies. Each tax might induce some consumers to drive less, some to switch from two vehicles to one, and some to buy a car instead of an SUV. Our model captures these behaviors. For each rate of tax, we simulate the changes in all such choices and how the new choices affect …

Income Redistribution From Social Security, Don Fullerton, Brent Mast

Don Fullerton

Social Security, in 1935, was intended to provide for elderly individuals without adequate sources of income. And it has a “progressive” benefit schedule that replaces a higher percentage of past earnings for those with low past earnings than for those with high past earnings. For both these reasons, the U.S. Social Security system was thought to redistribute income from rich to poor--until recently, that is. Several research teams recently developed data and models that show a more complete picture of how much the U.S. Social Security system actually redistributes income. It is important to know as much as possible about …