Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures

We analyze the distributional and efficiency impacts of different allowance allocation schemesmotivated by recently proposed U.S. climate legislation for a national cap and trade system usinga new dynamic computable general equilibrium model of the U.S. economy. The USREP modeltracks nine different income groups and twelve different geographic regions within the U.S. Wefind that the allocation schemes in all proposals are progressive over the lower half of the incomedistribution and proportional in the upper half of the income distribution. Scenarios based on theCantwell-Collins allocation proposal are less progressive in early years and have lower welfarecosts due to smaller redistribution to low income households and, consequently, lower income-induced increases in energy demand and less savings and investment. Scenarios based on thethree other allocation schemes tend to overcompensate some adversely affected income groupsand regions in early years, but this dissipates over time as the allowance allocation effect becomesweaker. Finally, we find that carbon pricing by itself (ignoring the return of carbon revenuesthrough allowance allocations) is proportional to modestly progressive. This striking result followsfrom the dominance of the sources over uses side impacts of the policy and stands in sharp contrastto previous work that has focused only on the uses side. The main reason is that lower incomehouseholds derive a large fraction of income from government transfers, and we hold the transfersconstant in real terms, reflecting the fact that transfers are generally indexed to inflation. As aresult, this source of income is unaffected by carbon pricing while wage and capital income isaffected.

Rausch, Sebastian, Gilbert E. Metcalf, John M. Reilly and Sergey Paltsev (2010), Distributional Implications of Alternative U.S. Greenhouse Gas Control Measures, B.E. Journal of Economic Analysis & Policy 10(2)