Energy Policy Tradeoffs between Economic Efficiency
and Distributional Equity

September 16-17, 2016
Tatyana Deryugina and Don Fullerton, both of University of Illinois, and William A. Pizer of Duke University, Organizers

Chris Bruegge, Stanford University; Tatyana Deryugina; and Erica Myers, University of Illinois

The Distributional Effects of Building Codes

For almost 40 years, building energy codes have been used to try to improve the energy efficiency of newly constructed and renovated buildings. But recent empirical research has cast doubt on how much they actually affect energy use. Moreover, it is routinely pointed out that pricing the externalities of energy use directly would be a more efficient policy than a building standard. However, energy pricing policies are often regressive, and transfers that would offset this regressivity may be difficult or impossible to implement. At the same time, whether building energy codes themselves are regressive or not is unclear. Using spatial discontinuities in California's building code strictness and information about over 185,000 homes located around such borders, Bruegge, Deryugina, and Myers evaluate the effect of building codes on home characteristics, energy use, and sales prices; they also study building codes' distributional burdens. The researchers find that stricter energy use requirements cause builders to build smaller homes, creating an aggregate reduction in energy use but not leading to a detectable change in consumption on a per-square-foot basis. There is, however, substantial heterogeneity by income.

Sebastien Houde, University of Maryland, and Joseph Aldy, Harvard University and NBER

The Efficiency and Distributional Consequences of Subsidies for Energy-Efficient Appliances

Mar Reguant, Northwestern University and NBER

The Distributional Impacts of Large-Scale Renewable Policies

Renewable policies have grown in popularity across states in the U.S., and also worldwide. The costs and benefits from renewable policies are unevenly distributed across several margins: incidence across producers and consumers, regional heterogeneity in renewable potential, differences in the existing generation mix, etc. The efficiency and distributional implications of large-scale policies crucially depend on the design of wholesale policies and how targets are set, but also on how the costs of such policies are passed-through to consumers. Given that renewable investments are mostly fixed costs, there are many different ways in which to implement these policies on both margins. Using data from the California electricity market, Reguant develops a model to study the interaction between large-scale renewable policies (carbon taxes, feed-in tariffs, production subsidies and renewable portfolio standards) and their pricing to final consumers under alternative retail pricing schemes. The results highlight trade-offs between efficiency and distributional objectives.

Lucas Davis, University of California at Berkeley and NBER, and Christopher Knittel, MIT and NBER

Are Fuel Economy Standards Regressive?

Despite widespread agreement that a carbon tax would be more efficient, many countries use fuel economy standards to reduce transportation-related carbon dioxide emissions. Davis and Knittel pair a simple model of the automobile automakers' profit maximization problem with unusually-rich nationally representative data on vehicle registrations to estimate the distributional impact of U.S. fuel economy standards. The key insight from the model is that fuel economy standards impose a constraint on automakers which 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. The researchers use the model to determine which U.S. vehicles have been most subsidized and taxed since 2012, and they compare the pattern of ownership of these vehicles between high- and low-income Census blocks. Finally, the researchers compare these distributional impacts with existing estimates in the literature on the distributional impact of a carbon tax.

Stephen Holland, University of North Carolina at Greensboro and NBER; Erin Mansur, Dartmouth College and NBER; Nicholas Muller, Middlebury College and NBER; and Andrew Yates, University of North Carolina at Chapel Hill

Distributional Effects of Air Pollution from Electric Vehicle Adoption

In 2014, approximately 130,000 electric vehicles were registered in the United States. Holland, Mansur, Muller, and Yates examine the distributional effects of the change in air pollution from driving these vehicles. The researchers find that people living in census block groups with median income that is greater than about $67,000 receive positive environmental benefits from electric vehicles while those below this threshold receive negative environmental benefits. There is strong evidence that census block groups with larger shares of Asian and Hispanic residents tend to receive greater environmental benefits. There is weaker evidence that block groups with larger share of white and black residents tend to receive smaller environmental benefits. The researchers also analyze the relationship between environmental benefits and purchase subsides for electric vehicles.

Arik Levinson, Georgetown University and NBER

Are Energy Efficiency Standards Less Regressive Than Energy Taxes?

Economists promote energy taxes as cost-effective, but policymakers raise concerns about their distributional consequences, preferring to set energy efficiency standards instead. Levinson compares the two in the context of automobile regulations, and shows that a gasoline tax would be less regressive than a revenue-equivalent fuel economy standard, and that both are less regressive than the footprint-based standard the U.S. switched to in 2011. Levinson shows that in theory this result is not unexpected. Finally, he provides supporting evidence from energy efficiency features of appliances and building construction.

Julie Anne Cronin, U.S. Treasury Department; Don Fullerton; and Steven Sexton, Duke University

Carbon Tax Rebates and Redistribution

A number of studies have analyzed the implications of carbon taxes for vertical equity, explored conditions under which a carbon tax is regressive, and studied complementary tax reforms that would be revenue neutral and preserve progressivity. But no previous research has explored the extent to which complementary tax reforms can both achieve vertical equity and avoid variation in tax treatment among families of similar means. Cronin, Fullerton, and Sexton consider three alternative mechanisms for revenue-neutral carbon tax reforms that utilize existing tax and transfer programs to mitigate regressivity and try to minimize disparities in outcomes within income classes. They find that aggregate statistics on average tax changes for each decile conceal considerable heterogeneity in tax treatment. Particularly, reforms that yield average reductions to low-income groups in fact deliver small tax increases to most low-income families. The researchers also find that a carbon tax is not regressive when transfers and income tax brackets are properly indexed. They find that the modeled reforms impose a tradeoff between preservation of vertical equity and horizontal equity.

Carolyn Fischer, Resources for the Future, and Billy Pizer

Equity versus Efficiency in Energy Regulation

Choices in energy regulation often involve options with divergent impacts on household energy prices, particularly regarding electricity. At the same time, household energy use varies widely, across income and demographics, as well as within any easily identifiable group. This suggests that these choices can have significant distributional effects to be weighed alongside efficiency concerns. In this paper, Fischer and Pizer explore the equity consequences of changing energy prices and various options for accounting for these consequences.

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