Pigovian Research Articles

Pareto Efficient Central Redistribution with Decentralized Redistribution

In an economy with both inter- and intra-region inequality and inconsistency between the objectives of local and central governments, this paper studies optimal non-linear federal (central) income tax under non-linear regional income taxes. Starting with a benchmark model without labor mobility, it uses the variation approach to derive a statistic-based optimal federal income tax formula, which turns out to be a function of social welfare weights, regional income distributions and labor income elasticities. Unlike the traditional Mirrleesian tax, the optimal federal income tax depends on the inter-government gap of preference instead of the central government's own preference. In particular, the optimal tax rate is non-negative (non-positive) when the central government has a relatively higher (lower) preference for equality. While in an economy without labor mobility the federal income tax is limited to remedy the inconsistency of objectives, introducing labor mobility activates federal income tax's role as a Pigovian tax which internalizes the horizontal revenue externality. The numerical analysis suggests that even if the decentralized redistribution is undesirable compared to the fully centralized redistribution, it is generally desirable when combined with the central redistribution.

Do Market Failures Create a ‘Durability Gap’ in the Circular Economy?

Circular Economy literature recommends longer lasting products, in order to reduce pollution from extraction, production, and disposal. Our economic analysis finds conditions where consumers choose lives that are too short – a “durability gap”. Then policies targeting durability raise welfare. While externalities are corrected by Pigovian taxes that ignore durability, raising the output tax nonetheless induces consumers to pay more for goods that last longer. Second, if the tax is suboptimal, a durability mandate raises welfare. Third, internalities have ambiguous effects. Fourth, a social discount rate less than private discount rate is the strongest case for policy to favor durability. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Constitutional Review of Federal Fiscal Legislation

What does the Constitution mean when it says that “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States” (US Const. Article I, Section 8, Clause 1)? The definition of “tax” for constitutional purposes has become important in light of the Supreme Court’s 2012 decision in NFIB v. Sebelius, in which Chief Justice Roberts for the Court upheld the constitutionality of the individual mandate of the Affordable Care Act under the taxing power. This has led to commentators questioning the utility of Roberts’ distinction between a “tax” (where Congress’ power is almost unlimited) and a “regulation” (where Congress’ power under the Commerce Cause is limited). We would propose a different distinction. A “tax” for purposes of the Taxing Clause is a pure tax, namely a tax implemented for raising revenue for the government “to pay the Debts and provide for the common Defence and general Welfare of the United States”. In addition, pure taxes can legitimately be used for distributive purposes, i.e., to reduce inequality. Even a pure tax has constitutional limits, but they are relatively few. This should be distinguished from a regulatory tax, i.e., a tax whose main purpose is not to raise revenue but to change taxpayer behavior. Regulatory taxes include Pigouvian taxes (e.g., tobacco taxes and carbon taxes) designed to reduce negative externalities and tax expenditures (deviations from a normative tax base). Regulatory taxes should be subject to constitutional review under various clauses of the Constitution including the Due Process Clause, the Equal Protection Clause, and the limits on the Commerce Clause. The penalty imposed by the individual mandate of the ACA, which was repealed in 2017, was a regulatory tax and therefore (contrary to Chief Justice Roberts’ view) subject to the limits on Congressional power under the Commerce Clause. Any actual tax has more than one purpose. All taxes influence behavior, and therefore come within our definition of regulatory taxes, and all taxes produce some revenue and effect some redistribution, and therefore come within our definition of pure taxes. But some taxes are primarily regulatory (e.g., Pigouvian taxes) while others are primarily for revenue (e.g., Value Added Tax, VAT) or redistribution (e.g., the personal income tax, PIT). Other taxes have multiple purposes (e.g., corporate income tax, CIT, which has revenue and redistribution as well as regulatory aims). Moreover, any given tax may have multiple provisions with different aims (e.g., the many tax expenditures embedded within PIT and CIT). When evaluating the constitutionality of any given tax provision, a court should first classify it as either a pure tax provision or a regulatory tax provision. If it is the former, the court should generally hold that it is constitutional under the Taxing Clause. If it is the latter, the court should evaluate it against the limits imposed by the rest of the Constitution.

The Preferential Treatment of Green Bonds

We study the preferential treatment of green bonds in the Central Bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. Green and conventional entrepreneurs issue bonds to banks that use them as collateral. The associated collateral premium induce entrepreneurs to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on entrepreneur risk-taking, and subsidizing green investment. Due to these adverse side effects, optimal collateral policy is characterized by modest preferential treatment, thereby increasing the green bond share and, to a smaller extent, the green investment share, which in turn reduces pollution. The limited response of green investment is directly related to higher risk-taking of green entrepreneurs. Furthermore, we show that preferential treatment is an imperfect substitute of Pigouvian taxation on pollution: only if the optimal tax can not be implemented, optimal collateral policy features preferential treatment of green bonds.

What’s the damage? Monetizing the environmental externalities of the Dutch economy and its supply chain

The environmental externalities of economic activities, such as anthropogenic climate change and pollution, have major social, environmental and economic consequences. Monetary valuation of these externalities is a widely acclaimed approach to better account for them in economic decisions, as it provides an appropriate price level for charging a Pigouvian tax. Yet, little research exists on the monetary valuation of the environmental externalities associated with Dutch economic activities and the impact of pricing them on the profitability of different sectors. To address this gap, this paper estimates the monetary value of 30 environmental externalities associated with the activities of 13 sectors and 163 subsectors for the year 2015, based on a global environmentally extended input-output model. It then compares these environmental costs with the financial performance of the sectors to provide an appraisal of potential profit at risk. The findings show that total environmental damage costs associated with the Dutch economy amount to EUR 50 Bn or 7.3% of Dutch GDP in 2015. They also demonstrate that some sectors (energy production, waste and sewage treatment, manufacturing, transport and agriculture) do not generate sufficient profit to cover their natural resource use and pollution costs. These sectors are particularly exposed to the transition risks associated with the internalization of these costs through, for instance, taxation or stricter regulation. It is especially important for financial institutions to be aware of the presence of these risks. The analysis within this research could help to introduce and improve standards and systems, including relevant regulations aimed at internalizing the external costs of production, extraction and consumption. Moreover, these tools can also support financial institutions to inform their heat mapping exercises, the assessment of materiality and/or measurement of environmental transition risks more broadly.

Resource and Environmental Policies for the Mining Industry: What Should Governments Do About the Increasing Social and Environmental Risks?

Growing demand for materials required in the construction of renewable technologies and zeroemission infrastructure may signal significant changes for the minerals and metals market. These in turn might exacerbate the social and environmental risks associated with the mining industry. We explore the impacts of commodity price volatility, the adoption of new technology and environmental risks on the long-term sustainability of a stylized mining firm and examine the implications for government policy intervention. We first analyze whether a mine should remain open or be closed when premature closing is costly due to land rehabilitation and reclamation resulting from an environmental accident. We then go on to investigate alternative resource policy instruments for by which the government may extract resource rents, examples being an ad valorem tax on output, a mining industry-specific corporate tax rate and a royalty on the amount of ore removed. Furthermore, we evaluate the potential of a number of means to correct for environmental externalities and compensate for damages that a mine causes during its lifetime, specifically a Pigou tax on effluents, fines on environmental accidents, mandatory up-front payments to an environmental liability fund and a surety bond to cover closure and reclamation costs.

Green Economy in Sustainable Development and Improvement of Resource Efficiency

In the expansion of volumes of industrial production, there is an increase of anthropogenic influence and deterioration of the external environment that became the reason for the impossibility of a functioning market system without taking into account negative externalities. The article considers the directions and principles of a “green economy” functioning as the basis for further development of society. The current state and trends of the impact of environmental factors on other indicators of quality of life have been analysed and comparative analysis has been made on the example of developed and developing countries. Effective indices and instruments of influence on the level of ecological and economic development and main tendencies and problems arising at the introduction of “green economy”, have been considered. The use of indicators that take into account negative externalities, such as the Pigouvian tax, has been demonstrated to be more visible than widely used indices. The losses from the negative impact on the resulting economic indicators have been analysed, and a significant decrease in the per capita GDP level has been proved with the extensive development of the economy.Implications for Central European audience: This paper aims to contribute to the development of a green economy as part of a policy aimed at reducing environmental risks in the process of economic growth. The proposed indicators and tools for influencing the level of environmental and economic development arising from the implementation of the “green economy” as the main vector of sustainable development, which can be used further research and development and can be implemented by European companies.

Strategic environmental policy and international market share rivalry under differentiated Bertrand oligopoly

Abstract We analyse strategic environmental policies under international Bertrand oligopoly when firms in different industries, located in different countries, produce differentiated products. Under cooperation, emission prices always exceed the joint marginal damage from pollution. Under non-cooperation, internationally nontradable and tradable emission permit prices are always higher than the domestic marginal damage from emissions (the Pigovian tax); emission taxes can also exceed the Pigovian tax. The non-cooperative emission prices under all instruments can exceed the joint pollution damage. Internationally tradable permits generate outcomes closest to cooperation — they result in the lowest pollution and the highest welfare among all instruments under non-cooperation. Pollution is the highest and welfare the lowest with taxes. Our results provide support for allowing international trade in emission permits even when governments choose their permit levels non-cooperatively.

Assessment of Effectiveness of Sustainable Transport Development

The traditional assessment of efficiency ofoperations and of development projects of transportsystems is based on a mercantilist approach thatconsiders efficiency of activities according to the«cost–income–profit of economic entities» pattern.In this case, non-systemic, external results areusually not considered, while they can be many timeshigher in value terms than the internal resultsobtained by economic entities. External results areoften seen outside the realm of purely economicrelations. This is especially evident in theinfrastructure sector, the material basis of which isformed by transport and logistics. To some extent acrisis of economic doctrine has arisen. An ecologicalcrisis is being observed due to unrestrainedanthropogenic activity. The concentration of peopleand production activities in cities has become thecause of the urbanization crisis. Growing inequalityhas led to an exacerbation of social contradictions.As a result, mankind has faced a complex crisis ofcivilization. Sustainable development was recognizedas the main means of resolving the crisis. Sustainabletransport dev elopement-being primarily aninfrastructure field of activity, serves as thefoundation for building sustainable development ofthe economy and social sphere. The sustainabledevelopment goals set by the world communityunder the auspices of the UN can only be achievedthrough the comprehensive assessment ofeffectiveness of management decisions (cumulativeaccounting of all internalities and externalities).Transport has become a pioneer in sustainabledevelopment of territories and cities. The approachto a comprehensive assessment of effectiveness ofsustainable development determines the reform ofeconomic and fiscal relations in the future accordingto the principle of the Pigou tax.The objective of this article is to explore ways toimprove assessment of effectiveness andmethodology of sustainable development oftransport organizations and transport systems. Thearticle substantiates the relevance and directions ofimproving the methodology for a comprehensiveassessment of the results of transport activities andpresents analytical models for a comprehensiveassessment of its effectiveness. The promising tasksfor continuation of research and development areassociated with justification and legal legitimation ofthe use of cost estimates of various external resultsof improving transport, as well as with developmentof a system for monitoring of information necessaryfor a comprehensive assessment of sustainabletransport development.

Implementing carbon tax: from rhetoric to reality

Climate change and rising greenhouse gas emissions are the greatest concerns facing humankind today. The year 2019 was a particularly bad year for Planet Earth. The exceptional rise in atmospheric temperatures and raging heat, led to unprecedented and prolonged wildfires–the amazon rainforest fire, the Australian bushfire and a series of wildfires in the Arctic region. Recognising the urgency, the international community has agreed to act collectively. As part of the Paris Climate Agreement, most countries have undertaken carbon reduction targets. As the overall mitigation targets under the Paris Agreement appear inadequate, countries have been exploring additional approaches for carbon mitigation. One option that certain WTO Members have been considering is to impose a price on carbon in the nature of a Pigouvian tax. In the present case, it will be a tax on carbon emissions. However, imposing a carbon tax only on domestic goods will result in issues of carbon leakage as well as decreased competitiveness of the domestic industry. Therefore, WTO Members (such as the European Union) are proactively considering imposition of equivalent taxes on imports also. Such equivalent taxes will essentially be in the nature of a border adjustment taxes under the GATT 1994. This Article examines the compatibility of the border tax adjustments on carbon under the relevant provisions of the GATT 1994, in light of the jurisprudence developed so far. The Article also assesses the possibility for Members to have a recourse to general exceptions under Article XX of the GATT, were a border tax adjustment measure held inconsistent with the substantial obligations under the GATT 1994. In addition to the popular alternatives available under Article XX(b) and Article XX(g) of the GATT 1994, the article has explored the possibility of resorting to Article XX(a), in light of the recent findings in United States - Tariff Measures on Certain Goods from China . Finally, the Article highlights that in order to ensure the overall social and political acceptability of a potential border carbon measure, WTO Members need to be mindful of the multilateral mandate developed in the Paris Agreement.

EFFICIENCY WITHOUT OPTIMALITY: ENVIRONMENTAL POLICIES AND POLLUTION PRICING IN THE LATE 1960S

In the late 1960s, new environmental policies emerged that attempted to reach predetermined pollution standards in a cost-effective way: i.e., the “standard-and-tax” approach proposed by William J. Baumol and Wallace E. Oates, and the permits market approach proposed by John Dales. This paper describes the early history of the two approaches, and compares them. Although today they refer to different traditions, namely Pigovian versus Coasean, and are often contrasted in the literature, these cost-effective solutions emerged at the same time and for the same reasons. First, they both tried to promote incentives-based policies against traditional regulations; second, they criticized the optimal Pigovian tax, which raised the contentious issue of measuring pollution damage. More broadly, they emerged as a kind of pragmatic compromise, fed by a common attempt to move toward more practical policies: reaching efficiency without optimality, while relying on standards whose setting is a matter for political decision.

ENVIRONMENTAL POLICY OF RENEWABLE ENERGY INDUSTRY UNDER OPEN CONDITIONS

<p>Renewable energy has two environmental externalities: one is the positive externality as an alternative to fossil energy consumption; the other is the negative externality with its production process consuming fossil energy. If the domestic renewable energy products export to foreign country with not only generating but importing renewable energy, what the environmental policy of both domestic and foreign governments should be? To this end, this paper establishes a renewable energy trade model of the two countries having only one firm for each other. Under the Cournot competition, the results show: first, if the two governments have no cooperation, the best environmental policy for domestic government would be taxation, but not necessarily the Pigouvian tax; foreign government not only impose on foreign manufacturer equal to pollution marginal damage, but also subsidize it over the marginal revenue of renewable energy; Second, if the two governments cooperate, the joint pollution tax is Pigouvian tax equal to the marginal damage of total pollution emissions, while joint subsidy is higher than the marginal revenue of total renewable energy.</p>

Emission taxes and feed-in subsidies in the regulation of a polluting monopoly

The paper studies the use of emission taxes and feed-in subsidies for the regulation of a monopoly that can produce the same good with a technology that employs a polluting input and a clean technology. In the first part of the paper, we show that the efficient solution can be implemented combining a tax on emissions and a subsidy on clean output. The tax is lower than the environmental damages, and the subsidy is equal to the difference between the price and the marginal revenue. In the second part of the paper, the second-best tax and subsidy are also calculated solving a two-stage policy game between the regulator and the monopoly with the regulator acting as the leader of the game. We find that the second-best tax rate can be the Pigouvian tax, but only if the marginal costs of the clean technology are constant. Using a linear–quadratic specification of the model, we show that the clean output is larger when a feed-in subsidy is used than when the tax is applied, but the dirty output can be larger or lower depending on the magnitude of marginal costs of the clean technology and marginal damages. The same occurs for the net social welfare, although we find that for low enough marginal costs of the clean technology, the net social welfare is larger when a feed-in subsidy is used to promote clean output regardless the importance of the marginal damages.

Tax Reform for the Energy Transition in Korea’s Power Generation Sector

The tax structure capable of achieving an energy transition in the power sector was analyzed by applying the Pigouvian tax on generation fuels. Under the 2018 Tax Act Amendment, the tax rate criteria for the excise tax on power generation fuels changed from the calorific value to environmental externalities of the fuel. However, to reverse the merit order of bituminous coal generation with liquefied natural gas (LNG) generation, reflecting only some external costs of the environment as a tax is not enough. In this paper, we established four tax reform scenarios for bituminous coal and LNG considering environmental externalities, and we analyzed the reversal of dispatch priority using the electricity system unit commitment and M-Core economic dispatch model. According to the analysis results, the share of bituminous coal generation will be reduced to 10–20% depending on the scenario, reflecting the relative tax rate equalizing the fuel costs of bituminous coal and LNG power. To achieve an energy transition by reversing the merit order of bituminous coal and LNG generation, the tax rate of bituminous coal must be more than twice that of LNG. Moreover, to achieve an eco-friendly generation mix through tax reform, the external costs of the environment by fuel source should be accurately estimated and efficient taxation that can adequately reflect these external costs of the environment while considering tax fairness, neutrality and simplicity should be established.

Implementing Carbon Tax: From Rhetoric to Reality

Climate change and rising greenhouse gas emissions are the greatest concerns facing humankind today. As part of the Paris Agreement, a number of countries have undertaken carbon reduction targets. As the overall mitigation targets under the Paris Agreement appear inadequate and ineffective to meet the gravity of the challenge, several countries have been exploring additional approaches for carbon mitigation. One option is to impose a carbon tax which is in the nature of a Pigouvian tax. In most cases, it will be a tax on carbon emissions. As imposing a carbon tax only on domestic goods can result in carbon leakage, WTO Members such as the European Union (pursuant to the 2019 European Green Deal) are proactively considering the possibility of extending such taxes to imports also. This article examines the overall design concerns of a carbon tax and its conformity with WTO covered agreements.

Effects of the internalization of the social cost of global and local air pollutants in Chile

In 2017, environmental taxes on global pollutants (CO2) and local air pollutants (SO2, NOX, and PM) began to be collected to reduce emissions in Chile. However, large emitting sources only are subject to environmental taxes and the tax rates are much lower than the social cost of these pollutants, which does not allow to fully internalize the generated damages. For the above, this study uses the environmental extension of the Leontief price model and microsimulations to estimate the economic, environmental, distributive, and poverty short-term effects associated with the application of Pigouvian taxes on all emissions generated by productive activities. The results show that currently there are too many resources allocated to activities that generate strong negative externalities, mainly in the electricity and transport sectors. Specifically, the emissions are reduced almost 10 times more than in the current tax scenario if environmental taxes equal to social costs are applied, but relevant negative indirect effects are generated that make the practical application of a tax of these characteristics unrealistic. For example, there is a fall between 1.2% and 2.9% in employment, slightly worsening the income distribution and increases the poverty rate between 0.9 and 2.3 percentage points.

One Hundred Years Ago. The Book That Inspired the Carbon Price: Pigou’s The Economics of Welfare

While Arthur Cecil Pigou has slipped from the ‘first eleven’ of economics, his ideas have never been more relevant. His most important work was The Economics of Welfare, published in 1920. The book was well reviewed in contemporary economic journals. It is not, by the author’s own admission, a light read. But it lives up to Pigou’s ideal of offering ‘instruments for the bettering of human life’. The most influential idea developed in it is the ‘externality’ which can be corrected by what was later termed a ‘Pigouvian tax’. Nicholas Stern, in his eponymous report on the diabolical economics of climate change, referred to Pigou’s writings and a carbon price is an example of a Pigouvian tax. Pigou foreshadowed some of the insights of behavioural and environmental economics, noting how excessive discounting of the future caused environmental degradation. Among other areas covered in this extensive book are business cycles and many policy issues such as taxation, monopolies and industrial relations. Pigou famously would tell his students ‘it’s all in Marshall’. For many aspects of economics, it could be said ‘it’s all in Pigou’. On its centenary, this is a book deserving of more recognition.

Pigovian Subsidies for home delivery in times of COVID-19

In times of COVID-19, there are negative externalities associated with in-store shopping since if one is infectious one might transmit the disease to others. What is the optimal Pigovian subsidy for home delivery of food to internalize this externality? To address this question, we develop a model with three policy instruments: testing frequency, lockdown intensity, and a subsidy for home delivery of food. First, we consider the case where the testing frequency is adjusted so as to keep the pandemic's reproduction rate fixed. In this case, the value of the subsidy for home delivery is to allow for a reduction in the testing rate without affecting the reproduction number. This substitution is plausible when the testing rate is chosen optimally. Using illustrative calibrations for the US, we find in this case that the optimal ad valorem subsidy for home delivery of food is between 1.7% and 3.4%. However, it might be more likely that the testing rate continues to be chosen at a suboptimal level. In this case, reducing the reproduction rate of COVID-19 via subsidies for home delivery could cause a reduction in the expected lockdown intensity. Even if only 10% of the reduction in the reproduction rate is offset via reduced lockdown intensity, an ad valorem subsidy of between 5.4% and 10.8% will be warranted on these grounds alone.

The Green New Deal: Historical Foundations, Economic Fundamentals and Implementation Strategies

The Green New Deal (GND) serves as market solution to implement global environmental governance as “the sum of the many ways individuals and institutions, public and private, manage their common affairs.” This paper discusses the historical foundations, underlying economic mechanisms of the GND and contemporary implementation strategies of the GND. GND spending should target social and green causes fostering concepts such as eco-commerce, environmental enterprise, environmental finance, fiscal environmentalism, green accounting, economy, jobs and trading as well as sustainable energy. The economic policies proposed comprise of fiscal and monetary means, innovation efforts and behavioral changes. Concrete recommendations are given on carbon tax, emissions trading, green bonds, absorbing CO2 and forestation, insurance policies, intergenerational conscientiousness, engaging portfolio managers, ecotax, environmental pricing reform, environmental tariffs, net metering, Pigovian tax and sustainable tourism. All these efforts are to support global environmental governance. The paper closes with a prospective outlook of changes implied to the GND due to the novel Coronavirus (COVID-19) crisis.

Risk Shifts in the Gig Economy: The Normative Case for an Insurance Scheme against the Effects of Precarious Work*

Risk Shifts in the Gig Economy: The Normative Case for an Insurance Scheme against the Effects of Precarious Work*