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Double Dividend

Double Dividend: Environmental Taxes and Fiscal Reform in the United States

Dale W. Jorgenson
Richard J. Goettle
Mun S. Ho
Peter J. Wilcoxen
Copyright Date: 2013
Published by: MIT Press
Pages: 640
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  • Book Info
    Double Dividend
    Book Description:

    Energy utilization, especially from fossil fuels, creates hidden costs in the form of pollution and environmental damages. The costs are well documented but are hidden in the sense that they occur outside the market, are not reflected in market prices, and are not taken into account by energy users.Double Dividendpresents a novel method for designing environmental taxes that correct market prices so that they reflect the true cost of energy. The resulting revenue can be used in reducing the burden of the overall tax system and improving the performance of the economy, creating thedouble dividendof the title.The authors simulate the impact of environmental taxes on the U.S. economy using their Intertemporal General Equilibrium Model (IGEM). This highly innovative model incorporates expectations about future prices and policies. The model is estimated econometrically from an extensive 50-year dataset to incorporate the heterogeneity of producers and consumers. This approach generates confidence intervals for the outcomes of changes in economic policies, a new feature for models used in analyzing energy and environmental policies. These outcomes include the welfare impacts on individual households, distinguished by demographic characteristics, and for society as a whole, decomposed between efficiency and equity.

    eISBN: 978-0-262-31856-3
    Subjects: Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. List of Figures
    (pp. ix-xvi)
  4. List of Tables
    (pp. xvii-xx)
  5. Preface
    (pp. xxi-xxxii)
  6. 1 Designing Energy and Environmental Policies
    (pp. 1-32)

    In this book we present a new approach for designing energy and environmental policies in the United States. Developing and implementing a coherent energy and environmental policy has always been problematic. This arises from the fact that the production and use of energy are characterized by large and well-documented “hidden costs.” These costs are described in a congressionally mandated study by the National Research Council (NRC).¹ The most important hidden costs of energy result from the environmental effects of burning fossil fuels. In the absence of environmental policy, these costs are ignored by economic decision makers and are not reflected...

  7. 2 Structure of the Intertemporal General Equilibrium Model
    (pp. 33-76)

    The Intertemporal General Equilibrium Model (IGEM) presented in chapter 1 is a comprehensive model of the U.S. economy. The defining characteristic of a general equilibrium model is that prices are determined together with quantities through the interactions between supply and demand. In this chapter we describe the production sector that is central to the supply side of the model and the household sector that forms the core of the demand side.

    In the factor markets the household sector supplies capital and labor services, while the production sector demands these services as inputs. The model is completed by market-clearing conditions that...

  8. 3 Modeling Consumer Behavior
    (pp. 77-126)

    The objective of this chapter is to present a new econometric model of aggregate consumer behavior for the United States. The model allocates full wealth among time periods for households distinguished by demographic characteristics and determines the within-period demands for leisure, consumer goods, and consumer services. An important feature of the model is a closed form representation of aggregate demand and labor supply that accounts for the heterogeneity in household behavior observed in microlevel data. These aggregate demand and labor supply functions are the key component of the demand side of the Intertemporal General Equilibrium Model (IGEM) for the United...

  9. 4 Modeling Producer Behavior
    (pp. 127-188)

    The objective of this chapter is to present a new approach to econometric modeling of producer behavior. The index number approach to productivity measurement has been the work horse of empirical research for half a century.¹ This salient concept has generated a vast literature on productivity measurement, recently surveyed by Jorgenson variable in a neo-classical production function. Under appropriate assumptions the rate of technical change is the residual between the growth rate of output and the growth rate of inputs. Using index numbers for these growth rates, we can recover the level of technology without estimating the unknown parameters of...

  10. 5 Government and the Rest of the World
    (pp. 189-228)

    In chapter 2 we presented the Intertemporal General Equilibrium Model (IGEM). We outlined the equations of the production sector, which is the core of the supply side of the model. Our model of producer behavior is presented in more detail in chapter 4. We also discussed the equations of the household sector, which forms the center of the demand side of the model. Our model of consumer behavior is presented in more detail in chapter 3. Finally, in chapter 2 we presented the solution algorithm for determining the system of intertemporal equilibrium prices that equilibrates supply and demand.

    In this...

  11. 6 Model Solution
    (pp. 229-260)

    In this chapter we describe IGEM’s projection of the U.S. economy. We show how the various elements of the model determine overall GDP growth and the composition of economic activity, including energy use. Among the main drivers of growth are exogenous variables such as the population, the time endowment, labor quality and capital quality growth, current account deficits, government deficits, and tax policies. In addition, the exogenous state variables of the production, consumption, and trade models derive growth and the composition of activity. We describe how these exogenous values are chosen from official projections and from our own extrapolations.


  12. 7 Externalities
    (pp. 261-294)

    The primary purpose of IGEM is to simulate the effects of changes in energy and environmental policies on changes in outcome variables. These include energy use and emissions of pollutants as well as changes in economic variables such as GDP and welfare. We described the determination of the economic variables in chapters 2 and 5. In this chapter we describe the energy and environmental variables in more detail and outline how they are determined in the simulations reported in chapter 8.

    We first recall that IGEM defines 35 industry outputs (QIjt) and 35 commodities where each commodity may be produced...

  13. 8 Policy Evaluation
    (pp. 295-336)

    Intense debates over measures to reduce the growth of the U.S. public debt have focused attention on fiscal reform to increase tax revenues and reduce government expenditures.¹

    Environmental taxes have been mentioned as potential sources of revenue, but few detailed proposals for fiscal reform involving environmental taxes have emerged.² This is in spite of the support of market-based approaches to environmental policy by many economists.³ In this chapter we consider the economic and environmental impacts of taxes on emissions of greenhouse gases, expressed in terms of carbon dioxide equivalents. We refer to these ascarbon taxes.⁴

    We employed the IGEM...

  14. 9 Confidence Intervals
    (pp. 337-386)

    A distinguishing feature of the Intertemporal General Equilibrium Model (IGEM) presented in chapter 2 is that the parameters are estimated econometrically. The models of consumer behavior in chapter 3 are estimated from more than 150,000 observations for individual households from the Consumer Expenditure Survey (CEX). The models of producer behavior in chapter 4 are estimated from extensive time series data. Econometric estimates for the parameters of our models of government, investment, and the rest of the world are given in chapter 5. Covariance matrices for all these parameter estimates provide measures of uncertainty. In this chapter we use these measures...

  15. 10 Epilogue
    (pp. 387-390)

    The design of new energy and environmental policies for the United States requires a market-based approach for internalizing the health costs and environmental damages from using energy. The goal of environmental policy is to assure that all market participants face the incremental costs of energy use, so that these costs are incorporated into economic decisions. Market-based approaches like environmental taxes and tradable permits are cost-effective, since all market participants face the same prices for energy. Other approaches leave opportunities to reduce the cost of pollution abatement unexploited and impose undue burdens on economic activity.

    Market-based approaches to environmental policy could...

  16. Appendix A Equations and Glossary
    (pp. 391-436)
  17. Appendix B Accounts for General Equilibrium Modeling
    (pp. 437-532)
  18. Appendix C Econometric Results
    (pp. 533-574)
  19. Appendix D Model Solution Algorithm
    (pp. 575-580)
  20. References
    (pp. 581-592)
  21. Index
    (pp. 593-606)