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Environmental Taxes and Subsidies

Paper Session

Friday, Jan. 4, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, M202
Hosted By: Association of Environmental and Resource Economists
  • Chair: Justine Hastings, Brown University

Effects of Severance Tax on Economic Activity: Evidence from the Oil Sector

Jason Brown
Federal Reserve Bank of Kansas City
Peter Maniloff
Colorado School of Mines
Dale Manning
Colorado State University


State and local policymakers must balance taxing economic activity to generate
government revenue with the potential loss of activity with higher taxation. Despite the
important fiscal and economic implications of how drilling activity responds to changes in
severance tax rates, there is little empirical evidence on the sensitivity of drilling activity to state
severance tax rates. Moreover, little is known about the degree of spatial spillovers from tax rates
in neighboring states. The purpose of this paper is to estimate how responsive firms are to
differences in severance tax rates across states and over time. We investigate if firms respond
differentially to oil prices and severance taxes, and whether or not firms respond to neighboring
states’ severance tax rates.
Using data from Drillinginfo, we look at all oil wells drilled between 1980 and 2015 in
reservoirs that cross state lines. By focusing on reservoirs that cross state lines, we use fixed
effects to control for both reservoir (i.e., unobserved geologic quality) and unobserved state
characteristics such as permitting and regulatory ease. We find a stable and inelastic short-run
price elasticity of drilling equal to 0.8. We also find an inelastic response to severance taxes,
with a 1 percent increase in the dollar-per-barrel tax rate associated with a 0.3 percent reduction
in drilling. The positive response to neighboring states’ tax rates is small and does not differ
statistically from zero. It is also statistically smaller than the own-state elasticity.
Our estimates indicate that an increase in revenue from higher severance tax rates more
than offsets the resulting decrease in drilling activity. The policy implication is that small
increases in severance tax rates can allow states to increase revenue. Furthermore, engaging in
tax competition may lead to revenue losses in competing states.

Pollution and Unemployment over the Business Cycle

John Gibson
Georgia State University
Garth A. Heutel
Georgia State University


Understanding how optimal environmental policy responds to adjustments in the economy over the business cycle is very important for policy makers and can aid in the design of more efficient and equitable policies. Environmental policies that operate by restricting current output or by changing the cost structure of firms may also distort firms' capital investment and hiring decisions. In this paper, we introduce both a labor market search friction and a production process that releases harmful emissions as a by-product into a dynamic stochastic general equilibrium real business cycle model. Both search frictions and the modified production process generate externalities that are not internalized in a decentralized economy. We consider the interaction between labor market policies that either tax or subsidize vacancy creation with environmental policies that either impose a quantity restriction or an emission tax as an attempt to internalize all externalities present in the model economy

Market Power in Coal Shipping and Implications for U.S. Climate Policy

Louis Preonas
University of California-Berkeley


Economists have widely endorsed pricing CO2 emissions to internalize climate change-related externalities. Doing so would significantly affect coal, which is the most carbon-intensive major energy source. However, U.S. coal markets exhibit an additional distortion, as the railroads that transport coal to power plants can exert market power. This upstream distortion can mute the price signal of a corrective tax, due to changes in markups or incomplete tax pass-through. In this paper, I provide the first empirical estimates of how coal-by-rail markups respond to changes in coal demand. I find that rail carriers reduce coal markups when downstream power plant demand changes, due to a decrease in the price of natural gas (a competing fuel). I estimate markup changes that vary substantially across coal plants, resulting from a combination of heterogeneous transportation market structure and plant-specific demand shocks. Since low natural gas prices and a CO2 emissions tax similarly disadvantage coal, observed decreases in coal markups imply that pass-through of a federal carbon tax to coal power plants may be heterogeneous and incomplete. This could substantially erode the environmental benefits of a price-based climate policy. My results suggest that decreases in coal markups have increased recent climate damages by $2.3 billion, compared to a counterfactual where markups do not change.

Estimating the Fuel-tax Elasticity of Vehicle Miles Travelled from Aggregate Data

Werner Antweiler
University of British Columbia
Sumeet Gulati
University of British Columbia


This paper provides a novel and intuitive way to identify the fuel-tax elasticity of Vehicle Miles Travelled (VMT) using aggregate data. We approximate the VMT elasticity by subtracting the elasticity of fuel efficiency (a vehicle investment elasticity) from the overall elasticity of fuel consumption in a region. Our data from Canada allows significant variation in fuel taxes across regions and over time, giving us reliable estimates of the fuel-tax elasticity of VMT. Our estimates indicate that the long run impact from investment in fuel-efficient vehicles is slightly larger than the short run impact of reduced consumption, and our main specification yields an estimate of the fuel tax elasticity of VMT at approximately –0.65. As a part of this analysis we also find unique evidence of economically small but empirically significant “carbon leakage” from cross-border travel. Our methodology and results inform future work estimating the impact of fuel tax policies on distance-related negative externalities.
Justine Hastings
Brown University
Marc Hafstead
Resources for the Future
Sumeet Gulati
University of British Columbia
Gabriel Lade
Iowa State University
JEL Classifications
  • Q5 - Environmental Economics
  • H2 - Taxation, Subsidies, and Revenue