Environmental Economics

NBER Reporter: Summer 2000

Environmental Economics

The NBER's Project on Environmental Economics met in Cambridge on April 13. Project Director Don Fullerton of the University of Texas at Austin chose the following papers for discussion:

Richard J. Arnott, NBER and Boston College, and An Yan, Boston College, "Road and Rail: Second-best Pricing and Capacity"

Discussant: Kenneth A. Small, University of California, Irvine

Ronald J. Shadbegian, University of Massachusetts, Dartmouth; Wayne B. Gray, NBER and Clark University; and Jonathan Levy, Harvard University, "Spatial Efficiency of Pollution Abatement Expenditures"

Discussant: Robert N. Stavins, Harvard University

A. Lans Bovenberg, Tilburg University, and Lawrence H. Goulder, NBER and Stanford University, "Neutralizing the Adverse Industry Impacts of CO2 Abatement Policies: What Does It Cost?" (NBER Working Paper No. 7654)

Discussant: Gilbert E. Metcalf, NBER and Tufts University

Suppose that there are two modes of travel from point A to point B -- road and rail -- which are not perfect substitutes. Road congestion from A to B is underpriced; this distortion is unalterable. To respond to congestion, should the transportation planner choose a wider or narrower road, raise or lower the rail fare, and expand or contract rail capacity? Arnott and Yan review the literature on this problem and present some new results. Almost all existing work employs local analysis, examining how the second-best policy variables respond to an incremental increase in the road toll. However, such an analysis demands too much information to be useful in practical, quantitative terms. Thus future theoretical research should be redirected towards globalanalysis: deriving policy rules whose implementation demands less information.

Different pulp and paper plants spend different amounts on pollution abatement and achieve different levels of pollution reduction. Shadbegian, Gray, and Levy ask whether the allocation of pollution abatement expenditures is spatially efficient. That is, do plants with higher benefits from abatement spend proportionately more on it than plants with lower benefits? Combining plant-level Census Bureau data on pollution abatement expenditures with measures of pollution abatement benefits at those plants, and examining water and air pollution abatement costs and benefits separately, the authors find that the benefits from pollution abatement on average outweigh the costs. This is particularly true for air pollution control. Shadbegian, Gray, andLevy also find that the abatement costs at a plant are significantly positively related to abatement benefits for that plant. However, costs are less sensitive to benefits than would be expected if the only regulatory goal were spatial efficiency.

Using an intertemporal numerical general equilibrium model of the United States, Bovenberg and Goulder examine how efficiency costs change when CO2 abatement policies (such as carbon taxes) include features that neutralize adverse impacts on energy industries. The authors find that avoiding adverse impacts on profits and equity values in fossil fuel industries involves a relatively small efficiency cost. That is because CO2 abatement policies have the potential to generate revenues that are very large relative to the potential loss of profit. By enabling firms to retain a small fraction of these potential revenues, the government can protect firms' profits and equity values. If the government either grandfathered a small percentage of C02 emissions permits or exempted a small fraction of emissions from the base of a carbon tax, the results would be a small sacrifice of potential government revenue. Because the revenue sacrifice is small, the efficiency cost is also small. Bovenberg and Goulder further find that offsetting producers' carbon tax payments on a dollar-for-dollar basis (through cuts in corporate tax rates, for example) substantially overcompensates firms, raising profits and equity values significantly relative to the unregulated situation. This is because producers can shift onto consumers most of the burden from a carbon tax.

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