Household Incidence of Pollution Control Policies: A Robust Welfare Analysis Using General Equilibrium Effects

CIRPEE Working Paper No. 08-09

43 Pages Posted: 25 Jun 2008

See all articles by Abdelkrim Araar

Abdelkrim Araar

Université Laval - Département d'Économique

Yazid Dissou

University of Ottawa - Department of Economics

Jean-Yves Duclos

Laval University; IZA Institute of Labor Economics

Date Written: June 2008

Abstract

This study assesses the incidence of pollution control policies on households. In contrast to previous studies, we employ an integrated framework combining a multisector general equilibrium model with a stochastic dominance analysis using household-level data. We consider three policy instruments in a domestic emission trading system: (i) an output-based allocation of permits (OBA); (ii) the use of the proceeds of permit sales to reduce payroll taxes (RPT): (iii) and the use of these proceeds to reduce consumption taxes instead (UCS). The general equilibrium results suggest that the return to capital is more negatively affected than the wage rate in all simulations, since polluting industries are capital intensive. Abstracting from pollution externalities, the dominance analysis allows us to conclude that all three policies have a normatively robust negative (positive) impact on welfare (poverty). Formal dominance tests indicate that RPT first-order welfare dominates OBA over all values of household incomes. UCS also first-order poverty dominates RPT for any choice of poverty line below $CAN 18,600, and poverty dominates for any poverty line (and thus welfare dominates) at the second order. Finally, while the three pollution control policies do not have a numerically large impact on inequality (in comparison to the base run), statistical tests indicate that inequality increases significantly more with OBA and RPT than with UCS.

Keywords: Pollution control policies, household incidence, stochastic dominance, general equilibrium effects

JEL Classification: C68, D31, D58, D63, H23, Q52, Q56

Suggested Citation

Araar, Abdelkrim and Dissou, Yazid and Duclos, Jean-Yves, Household Incidence of Pollution Control Policies: A Robust Welfare Analysis Using General Equilibrium Effects (June 2008). CIRPEE Working Paper No. 08-09, Available at SSRN: https://ssrn.com/abstract=1148265 or http://dx.doi.org/10.2139/ssrn.1148265

Abdelkrim Araar

Université Laval - Département d'Économique ( email )

CREFA
Ste-Foy, Quebec 179Que G1K
Canada

Yazid Dissou

University of Ottawa - Department of Economics ( email )

55 Laurier
Ottawa, Ontario K1N 6N5
Canada

Jean-Yves Duclos (Contact Author)

Laval University ( email )

Quebec G1K 7P4
Canada
418-656-7096 (Phone)
418-656-9727 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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