Abstract
The stringency of environmental policy is likely to change the gains of economic agents. Using a general equilibrium model and an assumption that capital-intensive industries tend to be intensive emitters of greenhouse gases (GHG), we find that a stricter GHG emission scheme will reduce the rent for capital owners but increase the wage for workers. This effect could motivate capital owners or workers to oppose or support a stricter GHG policy. The paper also empirically assesses the model’s key assumption by using production input (capital stock and labor), output, and GHG emission data from U.S industrial sectors. The regression result supports a strong positive relationship between the capital-labor ratio and the pollution-output ratio. Therefore, the theoretical analysis is relevant to the actual economy.
Highlights
The benefits and costs associated with environmental policy may motivate people with common interest to coalesce for political action to influence the environmental policy making process
Using a general equilibrium model and an assumption that capital-intensive industries tend to be intensive emitters of greenhouse gases (GHG), we find that a stricter GHG emission scheme will reduce the rent for capital owners but increase the wage for workers
When general equilibrium theory is applied to predict the effect of a higher GHG emission standard on factor prices, the inference is that wages will rise and the rental cost of capital will fall
Summary
The benefits and costs associated with environmental policy may motivate people with common interest to coalesce for political action to influence the environmental policy making process. Damania and Fredriksson (2003) show that collusive industries with higher collusive profits have a greater incentive to affect policy makers in formulating environmental regulation, and those industries that are more polluting have strong incentive to form and contribute to a lobby so they can influence the environmental policy outcomes [5]. The literature focuses on the gain and loss of specific types of economic agents faced with environmental regulation but provides only limited explanations for the cost and benefit analysis for agents who do not fit into the stereotypes (environmentalists and polluters). To establish a broader structure to explain the effects of a stricter emission policy on capital and labor providers’ economic interests, our study aims first to create a framework based on fundamental economic theory and to empirically assess the underlying assumption of the framework. The result will help to shed light on their support for or opposition toward a more stringent climate change regime
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