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  5. Efficient Energy and Environmental Subsidies
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Efficient Energy and Environmental Subsidies

Paper Session

Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)

Convention Center, 225B
Hosted By: American Economic Association
  • Chair: Michael David Ricks, NBER

Time-Limited Subsidies: Optimal Taxation with Implications for Renewable Energy Subsidies

Owen Kay
,
University of Michigan-Ann Arbor
Michael David Ricks
,
NBER

Abstract

Pigouvian subsidies are effcient, but subsidies with limited durations are not Pigouvian. When using "time-limited" output subsidies, the optimal policy subsidizes output and investment, where investment subsidies separately correct for the limit. Because the change in production when the subsidy ends is a suffcient statistic for the optimal duration, we estimate this statistic using the US Renewable Energy Production Tax Credit for wind energy. Wind facilities reduce generation by 5-10% when the ten-year subsidy ends, demonstrating that time limits distort production even in inelastic industries, and suggesting that adapting to limits is key to improving industrial policy
elsewhere.

Regulatory Mandates and Electric Vehicle Product Variety

Frank Pinter
,
FTC
Sarah Armitage
,
Boston University

Abstract

Do local environmental policies spill over across states through product markets? We study the new vehicle market between 2009 and 2017 and show that a supply-side electric vehicle policy adopted by ten states affected the rest of the US through cross-state linkages in automaker pricing and product introduction decisions. To measure these effects, we incorporate constraints on cross-state price differences into a model of vehicle demand, pricing, and product introduction, and estimate demand, marginal costs, and bounds on entry costs. In counterfactual simulations, we find that alternative state-level policies that would have no effect under fully flexible pricing, such as replacing supply-side with demand-side subsidies, affect national electric vehicle sales and prices by changing auto manufacturers' tradeoffs across states.

Second-best carbon taxation in a differentiated oligopoly

Diego Cardoso
,
Purdue University

Abstract

Corrective environmental taxes are typically designed to match the value of marginal damages. This approach maximizes social welfare when an environmental externality is the only market imperfection. When multiple imperfections exist, however, knowing the marginal damages is insufficient for setting an optimal tax: it is also necessary to understand the market structure and quantify the effects of imperfections. This paper examines second-best carbon taxation in the US domestic aviation sector and documents novel empirical evidence of the large distortive effects of market imperfections on the efficiency of carbon taxes. Combining sufficient statistics and structural modeling approaches, I estimate abatement costs, calculate the optimal carbon tax under market power and non-environmental taxes, and investigate the effects of introducing a revenue-neutral carbon tax. I find that the current marginal abatement cost is 211–244 USD/ton CO2. Hence, any positive carbon tax would decrease social welfare if the social cost of carbon (SCC) is smaller than this value. Under a higher SCC of 300 USD/ton CO2, the optimal carbon tax is 107 USD/ton CO2, thus much lower than the standard Pigouvian tax. Moreover, attempting to improve policy efficiency with a revenue-neutral carbon tax would not yield a double dividend. While welfare gains would follow from reducing the tax deadweight loss and market power, price effects would be dampened by markup adjustments, leading to a net increase in aggregate emissions

Pollution Taxes as a Second-Best: Accounting for Multidimensional Firm Heterogeneity in Environmental Regulations

Ruozi Song
,
World Bank
Fan Xia
,
Nanjing University
Bing Zhang
,
Nanjing University

Abstract

This paper documents the first-order welfare effects of firm heterogeneity under a homogeneous emission tax regime. Local and firm-level variations in market power, abatement costs, and abatement benefits can create a gap between optimal and realized emission reduction. We examine this question in the context of China’s highly concentrated cement industry, which was subjected to multiple emission tax changes across time and location between 2011 and 2018. Using a comprehensive firm-level data set that allows us to estimate firm-level responses to regulation, we find substantial heterogeneity in the compliance behavior of firms --- through adjustments in output levels, price, and emission intensity. We then use the structurally estimated firm-level marginal abatement costs to quantify the deviation of local marginal pollution abatement costs from its marginal benefits. The model shows that the gap between observed abatement and production firm responses and the socially optimal responses is explained by two factors: the firm’s market power and the correlation between local abatement costs and benefits. By using variation in market power generated by two data-driven approaches and local abatement costs and benefits, we can empirically assess the importance of each of these two drivers of the sub-optimal response to emission taxes. A counterfactual analysis shows that output-based rebates coupled with a homogeneous emission tax can help mitigate the distortion from market power and generate a 4.72 billion RMB (0.67 billion dollars) welfare increase.

Discussant(s)
Louis Preonas
,
University of Maryland
Stephanie Weber
,
Yale University
Jonathan Hughes
,
University of Colorado-Boulder
Sarah Armitage
,
Boston University
JEL Classifications
  • Q5 - Environmental Economics
  • H2 - Taxation, Subsidies, and Revenue