Energy Policy Tradeoffs between Economic Efficiency and Distributional Equity
April 15-16, 2016
Chris Bruegge, Stanford University; Tatyana Deryugina; and Erica Myers, University of Illinois
Building energy codes have been used for close to 40 years to improve the energy efficiency of newly constructed and renovated buildings. Over this time period, almost all U.S. states have adopted and periodically increased the stringency of statewide energy codes. However, building codes are not as efficient as pricing the externalities of energy use directly. For example, an energy tax will create incentives to not only improve the building stock but to also reduce the amount of energy people choose to consume, conditional on the energy efficiency of the building. However, such taxes are often regressive, making them politically unpopular and therefore difficult to implement. Whether building energy codes themselves are regressive or not is unclear. For example, the savings from building codes requiring greater energy efficiency may be larger for richer households, because their houses tend to be bigger and they may use more energy overall. However, even if the monetary savings are larger for richer households in absolute terms, the savings relative to income may be much larger for the poor. Bruegge, Deryugina, and Myers consider the distributional consequences of building energy codes. To do so, they will use publicly available electricity usage data from households in California, combined with housing transactions and building permit data, which will allow them to determine the building energy code regime associated with each building. The researchers will use block-group-level Census data to approximate the income of each household in their sample. Following earlier literature, they will compare the energy usage of houses built just before and just after building code changes, breaking the analysis up by income to estimate the distributional consequences of building codes. In addition, the researchers will also compare building code costs and capitalization into housing prices across income groups.
Sébastien Houde, University of Maryland, and Joseph Aldy, Harvard University and NBER
To promote residential energy efficiency, federal, state, and local governments have relied on an array of fiscal policy instruments to subsidize energy-efficient appliances. Houde and Aldy investigate the impacts of the federal manufacturers tax credit, state and utility rebates, and sales tax holidays as well as electricity prices on consumers' decisions to purchase energy-efficient appliances. This analysis permits an evaluation of how households trade-off the purchase price of more fuel-efficient appliances with the lifetime operating costs given local electricity prices. They find significant heterogeneity in the response to the various policy instruments across the income distribution (and future work will test other socio-demographic measures). The estimated model can be used to examine various policy counterfactuals, including a comparison of a carbon tax to appliance rebates to sales tax holidays, in terms of their impacts on energy-efficient appliance purchases and expected energy consumption in aggregate and across various socio-demographic characteristics.
Mar Reguant, Northwestern University and NBER
Stephen P. Holland, University of North Carolina at Greensboro and NBER; Erin T. Mansur, Dartmouth College and NBER; Nicholas Z. Muller, Middlebury College and NBER; and Andrew J. Yates, University of North Carolina at Chapel Hill
Arik Levinson, Georgetown University and NBER
Lucas Davis, University of California at Berkeley and NBER, and Christopher R. Knittel, MIT and NBER
Don Fullerton, and Steven Sexton, Duke University
Economists commonly assert that pollution tax burdens can be offset by transfers, and thus efficiency and equity considerations can be separated. But how well can transfers offset burdens? One concern is vertical equity, the fair distribution of burdens up and down the income scale, but another problem is horizontal equity, fair treatment of those with the same income. Within an income group, households vary in their energy use, tax liability, and transfer participation. Income-targeted transfers would undercompensate some and overcompensate others. This paper will assess the capacity of existing transfer mechanisms to achieve vertical and horizontal equity following the imposition of an energy tax.
Carolyn Fischer, Resources for the Future, and Billy Pizer
Equity versus Efficiency in Energy Regulation
Absent transfers Pigouvian pricing policies can involve redistributions that are many times the net gain or loss to society. Burtraw and Palmer (2008) find that a pricing policy has social costs of roughly $0.5 billion annually, while consumers and producers lose more than $21 billion in payments to the government. Among firms, the aggregate loss is $3 billion, but some facilities gain $6 billion while others lose $9 billion. In contrast, performance standards involve smaller redistributions but lead to higher social costs. If distributional effects matter and are not addressed, the efficiency advantage of pricing policies is less compelling. Moreover, beliefs about individual and net social benefits could be lower still. Even if policymakers intend to address distributional concerns to avoid inequity, public support for the program could falter.