Climate Change Policy Design (Wallace Tyner, Purdue University, Organizer) Essay

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Climate Change Policy Design (Wallace Tyner, Purdue University, Organizer) DOES THE INDEXING OF GOVERNMENT TRANSFERS MAKE CARBON PRICING PROGRESSIVE? DON FULLERTON, GARTH HEUTEL, AND GILBERT E. METCALF Whether in the form of a carbon tax or cap-and-trade permit system, climate policy is likely to raise the price of all energyintensive goods such as electricity, heating fuel, and gasoline. The fraction of income used on these goods falls with income, measured either by annual income or by total annual expenditure (as a proxy for permanent income). Thus, climate policy is found to be regressive on the “uses side” (e.g. Burtraw, Sweeney, and Walls 2009, and Hasset et al. 2009). For these reasons, the economics literature and actual legislation have focused on whether permit revenue can be used to offset regressive burdens. In contrast, Rausch et al. (2010) use a computable general equilibrium model of the U.S. to find that carbon pricing is modestly progressive, even ignoring the use of the proceeds from a carbon tax or auctioned permits. One factor driving this surprising result is the progressivity of impacts on the “sources side”. Carbon pricing drives down returns to capital and to resource owners (both relative to the wage). Those returns are a large share of income sources for high income households. A Don Fullerton (dfullert@illinois.edu) is Gutgsell Professor in the Finance Department and Institute of Government and Public Affairs at the University of Illinois at Urbana-Champaign and a Research Associate at NBER, Garth Heutel (gaheutel@uncg.edu) is Assistant Professor in the Economics Department at the University of North Carolina at Greensboro, Gilbert E. Metcalf (gmetcalf@tufts.edu) is Professor in the Economics Department at Tufts University and a Research Associate at NBER. We thank David Hennessy, Dan Karney, and Wallace

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