Journal of the Association of Environmental and Resource Economists

Economists endorse taxes as a cost-effective means of reducing pollution. But policy makers raise concerns about their regressivity, or disproportional burden on poorer families, preferring instead to regulate energy efficiency. I first show that in theory, energy efficiency standards are more regressive than energy taxes, not less. I then provide an example using data on automobiles in the United States. Taxing gas would be less regressive than regulating the fuel economy of cars if the two policies are compared on a revenue-equivalent basis.

Despite widespread agreement that a carbon tax would be more efficient, many countries use fuel economy standards to reduce transportation-related carbon dioxide emissions. We pair a simple model of the automakers’ profit maximization problem with unusually rich nationally representative data on vehicle registrations to estimate the distributional impact of US fuel economy standards. The key insight from the model is that fuel economy standards impose a constraint on automakers that creates an implicit subsidy for fuel-efficient vehicles and an implicit tax for fuel-inefficient vehicles. Moreover, when these obligations are tradable, permit prices make it possible to quantify the exact magnitude of these implicit subsidies and taxes. We use the model to determine which vehicles are most subsidized and taxed, and we compare the pattern of ownership of these vehicles between high- and low-income census tracts. Finally, we compare these distributional impacts with existing estimates in the literature for a carbon tax.

We examine distributional effects of changes in local air pollution from driving electric vehicles in the United States. An econometric model estimates power plant emissions and an integrated assessment model values damages in air pollution from electric and gasoline vehicles. Using data on currently registered electric vehicles, we find that people in census block groups with median income greater than about $65,000 receive positive environmental benefits while those below this threshold receive negative environmental benefits. On average, Asian and Hispanic residents receive positive environmental benefits, but white and black residents receive negative environmental benefits. In multivariate analyses with census region fixed effects, environmental benefits are positively correlated with income and urban measures and with Asian, black, and Hispanic block-group population shares. Created environmental benefits tend to be larger in states offering purchase subsidies. However, for these states, an increase in subsidy size is associated with a decrease in environmental benefits.

We evaluate the distributional consequences of building energy codes for home characteristics, energy use, and home value. We exploit spatial variation in California’s code strictness created by building climate zones, combined with information on over 350,000 homes located within 3 kilometers of climate zone borders. Our key findings are that stricter codes create a nontrivial reduction in homes’ square footage and the number of bedrooms at the lower end of the income distribution. On a per-dwelling basis, we observe energy use reductions only in the second lowest income quintile, driven by decreases in square footage. Energy use per square foot actually increases in the bottom quintile. Home values of lower-income households fall, while those of high-income households rise, suggesting that building energy codes result in more undesirable distortions for lower-income households.

Renewable energy policies have grown in popularity. Given that renewable energy costs are mostly nonmarginal, due to the large presence of fixed costs, there are many different ways to implement these policies in both the environmental design and retail pricing margins. I show that the efficiency and distributional implications of large-scale policies crucially depend not only on the design of wholesale policies to incentivize renewables but also on how the costs of such policies are passed-through to consumers. Using data from the California electricity market, I develop a model to illustrate the interaction between large-scale renewable energy policies (carbon taxes, feed-in tariffs, and renewable portfolio standards) and their pricing to final consumers under alternative retail pricing schemes (no pass-through, marginal fees, fixed flat tariffs, and Ramsey pricing). I focus on the trade-off between charging residential versus industrial consumers to highlight tensions between efficiency, distributional, and environmental goals.

Are carbon taxes regressive? To calculate effects of a carbon tax on each family’s expenditures, plus distributional effects of three revenue-recycling mechanisms, we employ the US Treasury Distribution Model. It includes 322,000 tax returns, matched social security information, imputations from the Consumer Expenditure Survey, and an input-output matrix to calculate output prices. Accounting for statutory indexing of federal transfer programs, the calculated carbon tax burden as a fraction of consumption is progressive. Rebate of revenues via transfers makes it even more progressive. Within each decile, we find large variation in energy demands such as for heat in winter and cooling in summer. As a result, commonly ignored horizontal redistributions within deciles are shown to exceed vertical redistributions between deciles. Rebates via transfers widen horizontal redistributions. Some reforms deliver net income gains to the poorest families on average, even as a majority of those poor families incur losses.

Choices in energy regulation, particularly whether and how to price externalities, can have widely different distributional consequences both across and within income groups. Traditional welfare theory focuses largely on effects across income groups; such “vertical equity” concerns can typically be addressed by a progressive redistribution of emissions revenues. In this paper, we review alternative economic perspectives that give rise to equity concerns within income groups, or “horizontal equity,” and suggest operational measures. We then apply those measures to a stylized model of pollution regulation in the electricity sector. In addition, we look for ways to present the information behind those measures directly to stakeholders. We show how horizontal equity concerns might overshadow efficiency concerns in this context.