DOUBLE DIVIDEND: Environmental Taxes and Fiscal Reform in the United States

1. DOUBLE DIVIDEND: Environmental Taxes and Fiscal Reform in the United States byDale W. JorgensonHarvard University http://scholar.harvard.edu/jorgenson/ December 2, 2013

3. DOUBLE DIVIDEND In Environmental Economics the Standard Approach to Policy Evaluation Is to Rank Policies by Differences between Benefits and Costs. This Has Led to a Frantic Search for Benefits, For Example, in the Widely Cited Stern Review of the Economics of Climate, for the British Government. In the Contentious Debate that Has Followed, the Most Persuasive Argument for Climate Policy Has Been Overlooked: The Costs of Pollution Control Can Be Reduced to Zero! Careful Design of Climate Policies Makes It Possible to Attain Environmental Goals, Slowing Climate Change, while Improving Economic Performance, the Double Dividend of the Title.

5. QUOTATIONS FROM THE STERN REPORT Climate change would be so damaging to the world's economies it could reduce global GDP by as much as 20 per cent. Melting glaciers would cause water shortages for one sixth of the world's population. Wildlife would be so devastated that up to 40 per cent of the world's species might become extinct. Up to 200 million people could become refugees as their homes were hit by drought. By 2200 the annual cost of dealing with extreme weather events caused by "climate change" would be $23 trillion.

6. WHY WAS THE DOUBLE DIVIDEND OVERLOOKED? Arthur Cecil Pigou Originated Environmental Taxes When Government Budgets Were a Miniscule Portion of the Economy and Externalities Were Local. Marketable Property Rights Were Proposed as an Alternative by Nobel Prize Laureate Ronald Harry Coase and InspiredTradable Emissions Permits in the 1960’s. Government Budgets Are Now a Substantial Proportion of the GDP in Advanced Economies, As Much As 50 Percent, and Climate Change Is the Ultimate Global Externality. Under President Barack Obama’s Climate Action Plan of June 2013, U.S. Climate Policy is Based on Command-and-Control Regulation.

11. AN ECONOMETRIC APPROACH TO GENERAL EQUILIBRIUM MODELING Climate Economic Modeling, U.S. Environmental Protection Agency, http://www.epa.gov/climatechange/EPAactivities/economics/modeling.html Intertemporal General Equilibrium Model, Version Eighteen, 2013 Version One: Jorgenson and Wilcoxen, 1990. Version Sixteen: Jorgenson, Goettle, Ho, and Wilcoxen, 2012. Econometric Modeling of Producer Behavior: Jorgenson and Fraumeni, 2000; Jin and Jorgenson, 2010. Econometric Modeling of Consumer Behavior: Jorgenson, Lau, and Stoker, 1997; Jorgenson and Slesnick, 2008.

13. The Carbon Tax Scenarios

14. Household Welfare Effects, Family Size

15. Household Welfare Effects, Race & Gender of Head

16. Household Welfare Effects, Region & Location

20. DOUBLE DIVIDEND: SUMMARY We Have Identified a Double Dividend Based on Substitution of a Carbon Tax for a Capital Income Tax This Substitution is Based on Econometric Models of Producer and Consumer Behavior These Models Are Combined into an Intertemporal General Equilibrium Model of the U.S. Economy Policy Evaluation Compares a Base Case with No Change in Policy with Alternative Cases The Economic Impact of a Change in Policy Is a Money Metric Measure of the Change in Social Welfare

21. DOUBLE DIVIDEND: CONCLUSIONS       The Most Compelling Argument for Market-Based Environmental Policies Has Been Neglected      A Double Dividend Is the Simultaneous Achievement of Environmental and Economic Objectives Identification of a Double Dividend Is An Empirical Result, Not a Logical Conclusion This Requires Econometric Methods for Intertemporal General Equilibrium Modeling   Empirical Findings Must be Combined with Value Judgments Based on Horizontal and Vertical Equity

25. ECONOMETRIC MODELING OF PRODUCER BEHAVIOR: SUMMARY. Production Theory, Price Effects, and Share Elasticities. Latent Variables, Rate, and Biases of Technical Change and the Kalman Filter. Substitution and Technical Change Equally Important in Explaining Changes in Budget Shares. Autonomous and Induced Technical Change. Generally Opposite in Sign; Autonomous Change Generally Positive; Induced Change Generally Negative and Much Less Important.

26. ECONOMETRIC MODELING OF CONSUMER BEHAVIOR Allocation of Full Consumption among Leisure and Different Goods: Rank Two Versus Rank Three; Role of Human Capital; Cross-Section and Time-Series Variations in Prices; 154,180 Individual Observations on Expenditures, Including Leisure. Exact Aggregation over Households; Role of Prices, Expenditures, and Demographics. Compensated and Uncompensated Elasticities. Allocation of Full Wealth among Time Periods; Synthetic Cohorts.

41. ECONOMETRIC MODELING OF CONSUMER BEHAVIOR Allocation of Full Consumption and Full Wealth; Elasticities. Individual Observations on Expenditures, Including Leisure; Role of Human Capital. Exact Aggregation. Applications to Welfare Economics.

43. Household Welfare Effects, Reference HouseholdsEquivalent Variations in $(2005) and as %’s of full wealth 1 Female headed, non-white household with one child living in the rural South with lifetime full wealth of $0.8 million 2 Male headed, non-white household with three or more each of adults and children living in the urban West with lifetime full wealth of $32.8 million

45. Capital tax reductions are welfare superior despite their qualified regressivity • Labor tax reductions are welfare inferior despite their unqualified progressivity

46. Measures of Progressivity Robust across all carbon tax paths and the full range of egalitarian and utilitarian views

47. Statistically significant welfare resultsTuladhar and Wilcoxen

48. Appendix

49. Average Reductions in Tax Rates or Tax Equivalent Redistributions, 2016-2050

50. Household Welfare Effects, Largest and SmallestEquivalent Variations in $(2005) and as %’s of full wealth 1 Household characteristics often do not correspond to those represented in the adjacent $(2005) column