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UW-Madison AFROAMER 343 - lecture 27 aae 343 spring 2013 for students

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Topics Today (4/30/13)  Today’s material:  Carbon Tax as an ideal form of climate policy  Double dividend  Can address several externalities  Continue with Carbon Tax FAQs (slide 38 Lecture 26)  Carbon tax vs. carbon permits  Gas Tax  Gas Tax vs. CAFE standards  Jevons Paradox  Final exam, May 17, 5:05-7:05 PM, Biochem 1125. 1 Carbon tax is an ideal way to reduce emissions  Cost effective  Double dividend  Because CO2 generation is often correlated with other externalities, it can serve to improve social welfare by reducing these other externalities  Gas tax superior to CAFE standards  Consistent with result for emissions tax vs. command-and-control Summary 2 All the points made about the emissions taxes and TPPS applies to controlling CO2  Revenue-neutral carbon tax has a substantial advantage over free allocation of TPPs  Carbon tax has an advantage in terms of existence of infrastructure for it. Carbon Tax vs. Carbon TPPs (Cap-and-Trade) 3Policies generating climate-related benefits and other benefits: Gas Tax  Economists across the political spectrum support a tax on gasoline  “We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade”. Greg Mankiw, WSJ October 20, 2006; Harvard economist, GW Bush Chief of Council of Economic Advisors, Mitt Romney 2012 campaign economics consultant. 4Gas taxes around the world 5Policies producing joint benefits: Gas Tax  Empirical analysis of the optimal gas tax Parry and Small 2002 (revised 2004), “Does Britain or the United States Have the Right Gasoline Tax?”  Optimal gas tax is about $1 in 2004 (probably about $1.20 in current dollars)  By comparison, gas tax in WI, federal and state, is $0.51/gallon  Optimal tax reflects costs of multiple externalities http://www.rff.org/Documents/RFF-DP-02-12.pdf 6Policies producing joint benefits: Gas Tax  Tax components (2004 dollars, multiply by about 1.2 to get to 2012 dollars) http://www.rff.org/Documents/RFF-DP-02-12.pdf 7Policies producing joint benefits: Gas Tax  Not all of the externalities are directly related to gasoline consumption:  CO2 and emissions externalities are directly related to gas consumption;  The other two highlighted externalities are better taxed as a function of miles driven (perhaps spatially-defined taxes)  Ideally you would have a separate tax for each externality, with the tax just equal to the marginal externality cost. http://www.rff.org/Documents/RFF-DP-02-12.pdf 8Policies producing joint benefits: Gas Tax  Gas tax is “Second best”  One policy instrument for two types of problems (externalities associated with miles driven, externalities associated with emissions), so it will not generate the efficient solution (not as good as a set of smaller, targeted taxes) (HWK #9 examines this issue).  But it does provide flexibility in how individuals change their behavior that reduces both types of behavior  Examples? 9Other driving-related policy instruments: CAFE standards  Corporate Average Fuel Efficiency  Laws specifying that automakers must achieve an average fuel efficiency for the vehicles they sell (1978-79)  Originally intended mostly to reduce petroleum consumption, but obvious implications for CO2 and other emissions  Car vs. Light Truck  Killed the station wagon  Some automakers choose to pay a penalty rather than meet the target ($55 per mph under standard, per vehicle sold)  Examples: Ferrari, Porsche, Maserati, Mercedes-Benz 10CAFE standards  After initial legislation:  Fuel economy improved by 50% between 1978 and 1985. Reasons?  CAFE standards.  Higher gas prices.  Oil consumption dropped by 14%.  Smaller and lighter cars and trucks led to estimated 2000 more fatalities (annually) by 1993. Source: National Research Council report on CAFE standards. 11History of CAFE and CAFE standards 12History of CAFE and CAFE standards 13Economics of CAFE standards  What is the effect of CAFE standards on miles driven?  What is the effect on congestion?  What is the effect on accidents?  In principle, which policy instrument would deliver a desired emissions reduction most cost effectively, gas tax or CAFE standards? Why? 14 A=increase B=decrease C=no change D=dependsJevons Paradox Wikipedia: In economics, the Jevons paradox (pronunciation: /ˈdʒɛvənz/; sometimes Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource. Wikipedia: In 1865, the English economist William Stanley Jevons observed that technological improvements that increased the efficiency of coal use led to increased consumption of coal in a wide range of industries. He argued that, contrary to common intuition, technological improvements could not be relied upon to reduce fuel consumption. So is it possible CAFE standards increase the consumption of gasoline, thereby increasing emissions? 15Jevons Paradox 16 miles $ D S1 S2 m1 p1 m2 p2 Spend more on gasoline after the technological change (increased mpg) makes driving cheaper –gasoline consumption INCREASESJevons Paradox 17 miles $ D S1 S2 m1 p1 m2 p2 Spend less on gasoline after the technological change (increased mpg) makes driving cheaper –gasoline consumption DECREASES What determines whether the Jevons paradox applies? 18 Jevons Paradox miles D S1 S2 m1 p1 m2 p2 D What is the effect on the diagram of supply and demand for miles?  Does total gas use go up or down?  Does total gas expenditure go up or down? 19 Comparison to a gas tax A=supply shifts up and in B=supply curve shifts down and out C= demand shifts down and in D=demand shifts up and out A= up B= down C= depends on elasticity of supply for miles D=depends on elasticity of demand for miles S D miles $ A= up B= down C= depends on elasticity of supply for miles D=depends on elasticity of demand for milesComparison to a gas tax 20 miles $ D S2 S1 m2 p2 m1 p1 Skepticism about CAFE standards:  Marginal cost of driving decreases with fuel economy.  Incentive to drive more (“rebound effect”).  Driving increases 1 to 2% for each 10% reduction in the cost of


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UW-Madison AFROAMER 343 - lecture 27 aae 343 spring 2013 for students

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