The New Dynamics of Macro-Environmental Economics

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Swissotel Chicago, Zurich E
Hosted By: Association of Environmental and Resource Economists
  • Chair: Roberton Williams, University of Maryland

Are Carbon Taxes More Efficient in Industrializing Countries? Comparing China and India to the United States

Mark Jacobsen
,
University of California-San Diego
Richard Carson
,
University of California-San Diego
Antung Liu
,
Indiana University

Abstract

Conventional wisdom holds that, without considering environmental benefits, a carbon tax would reduce welfare. As a result, industrializing countries have entered climate change negotiations with demands for special treatment. We re-examine this conclusion by demonstrating how three factors explored in the prior literature can combine to reduce the welfare cost of a revenue-neutral carbon tax. Incorporating informal production, untaxed Ricardian rents, and tax evasion, we conduct a series of numerical simulations for developing countries, represented by China and India, and OECD ones, represented by the U.S. We find that overall efficiency costs are negative in all three countries for a significant range of reductions: employing a carbon tax is in fact cheaper than existing tax policy. Moreover, in the industrializing countries, with higher levels of these three factors, the costs of carbon tax policy are lower than those in the U.S. We believe our results extend to the tax systems in many developing economies.

Environmental Policy and Structural Environmental Change

Christos Makridis
,
Stanford University

Abstract

This paper builds and estimates a general equilibrium model with production (pollution) externalities to jointly explain income and price effects for the United States experience of structural change. First, I document the rise of energy-savings technologies and increased tastes for air quality since 1970. Second, I solve a multi-sector model featuring preferences over air quality and estimate it using simulated method of moments. The presence of non-separable preferences between pollution and consumption plays a key role in reconciling joint income and price effects. Since the inclusion of pollution creates non-homothetic preferences, the decline in manufacturing produces a rise in air quality, which occurs at precisely the same time that the price on services is growing. I decompose the contributions of income and price effects by simulating counterfactual models that omit income and price effects separately. Comparing each equilibrium allocation to the benchmark allows me to characterize the relative effects. On average, price effects dominate with the ability to explain 60% of structural transformation, while income effects explain the remainining 40%. Third, I simulate the effects of introducing permanent and temporary pollution taxes. I show that the magnitude of the counterfactual simulations depends crucially on assumptions about income and price effects.

Be Careful What You Calibrate For: Social Discounting in General Equilibrium

Lint Barrage
,
Brown University

Abstract

At what rate should policy-makers discount the future? One influential view posits that the social discount rate should be set below the market rate of return. This idea has risen to renewed prominence in climate change economics (e.g., Stern, 2006). This paper formalizes the broader policy implications of this view by characterizing and quantifying jointly optimal environmental and fiscal policies in a dynamic general equilibrium climate-economy model with differential planner-household discounting. First, I show that decentralizing the first-best allocation requires not only high carbon prices but also fundamental changes to tax policy: If the government discounts the future less than households, implementing the optimal allocation requires (i) capital income subsidies, and/or (ii) decreasing labor income taxes, and/or (iii) decreasing consumption taxes. Second, I consider a 'Sternian environmental planner' who can recommend carbon prices but cannot change income taxes. I show that the constrained-optimal carbon tax differs from the present value of marginal damages (the social cost of carbon) due to the general equilibrium effects of climate policy on household savings. These effects depend on (i) the nature of climate damages, (ii) complementarity between energy and capital in production, and (iii) complementarity between climate and consumption in utility. At the benchmark, the constrained-optimal carbon tax is up to 25% below the first-best 'Sternian' rate. Third, given the choice to optimize climate vs. tax policy, I find that a 'Sternian' planner may realize higher welfare gains from capital income subsidies than from high carbon taxes, depending on the intertemporal elasticity of substitution. Overall, in general equilibrium, a policy-maker's choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy.

Innovation-Led Transitions in Energy Supply

Derek Lemoine
,
University of Arizona

Abstract

I generalize a benchmark model of directed technical change to allow for a non-unitary elasticity of substitution between machines and other factors of production, interpreted here as energy resources. I show that the economy becomes increasingly locked-in to the more advanced sector when machines and resources are gross substitutes, but a transition from a dominant sector to the other is possible when machines and resources are gross complements. In that case, research activity transitions before resource extraction does. In the presence of lock-in, temporary research subsidies are sufficient to permanently redirect the economy towards a path that avoids dangerous climate change, but emission taxes become critical in the absence of lock-in.
Discussant(s)
Roberton Williams
,
University of Maryland
David Hemous
,
University of Zurich
Stephie Fried
,
Carleton College
Ujjayant Chakravorty
,
Tufts University
JEL Classifications
  • E0 - General
  • Q5 - Environmental Economics