TY - JOUR AU - Bovenberg,A. Lans AU - Goulder,Lawrence H. AU - Jacobsen,Mark R. TI - Industry Compensation and the Costs of Alternative Environmental Policy Instruments JF - National Bureau of Economic Research Working Paper Series VL - No. 13331 PY - 2007 Y2 - August 2007 UR - http://www.nber.org/papers/w13331 L1 - http://www.nber.org/papers/w13331.pdf N1 - Author contact info: Lans Bovenberg Tilburg University, P.O. Box 90153 5000 LE Tilburg, The Netherlands E-Mail: a.l.bovenberg@uvt.nl Lawrence H. Goulder Department of Economics Landau Economics Building 328 Stanford University Stanford, CA 94305 Tel: 650/723-3706 Fax: 650/725-5702 E-Mail: goulder@stanford.edu Mark R. Jacobsen Department of Economics, 0508 University of California, San Diego 9500 Gilman Drive La Jolla, CA 92093 Tel: 858/822-7767 Fax: 858/534-7040 E-Mail: m3jacobs@ucsd.edu AB - This paper explores how the costs of meeting given aggregate targets for pollution emissions change with the imposition of the requirement that key pollution-related industries be compensated for potential losses of profit from the pollution regulation. Using analytically and numerically solved equilibrium models, we compare the incidence and economy-wide costs of emissions taxes, fuel (intermediate input) taxes, performance standards and mandated technologies in the absence and presence of this compensation requirement. Compensation is provided either through lump-sum industry tax credits or industry-specific cuts in capital tax rates. We decompose the added costs from the compensation requirement into (1) an increase in "intrinsic abatement cost," reflecting a lowered efficiency of pollution abatement, and (2) a "lump-sum compensation cost" that captures the efficiency costs of financing the compensation. The compensation requirement affects these components differently and thus can alter the cost-rankings of policies. When compensation is provided through tax credits, the lump-sum compensation cost is higher under the emissions tax than under performance standards and mandated technologies -- a reflection of the emission tax's higher compensation requirements. If in this setting the required pollution reduction is modest, imposing the compensation requirement causes the emissions tax to become more costly than command and control policies. In contrast, if required abatement is extensive, the emissions tax emerges as the most cost-effective policy because its relatively low intrinsic abatement costs assume greater importance. ER -