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The Importance of Source-Side Effects for the Incidence of Single Sector Technology Mandates and Vintage Differentiated Regulation

Paper Number: 2019-03

Document Date: 04/2019

Author(s): Alex Marten

Subject Area(s): Distributional Effects, Modeling

JEL Classification: Q52, C68

Keywords: environmental regulation, incidence, general equilibrium

Abstract: Understanding the distribution of regulatory costs is key to evaluating whether a rulemaking exacerbates or ameliorates preexisting economic disparities and is of stated interest to many stakeholders and policy makers. Previous studies on the incidence of command-and-control environmental regulations have predominantly focused on the distribution of costs through final goods prices (the use side). However, the impact of regulations on household income (the source side) can be of first-order importance in determining the overall incidence. Using a detailed computable general equilibrium model of the U.S. economy we study the incidence of single-sector technology mandates across a broad set of industrial sectors. We find the use-side incidence is notably regressive but the source-side effects are progressive on average and tend to dominate the overall incidence of costs. This occurs as a significant share of regulatory costs is passed on through lower returns to capital and natural resources, which predominantly affects upper-income households, while indexed transfer payments partially shields the purchasing power of low-income households from increases in output prices. However, when the regulated sector predominantly produces final goods with inelastic demand and low trade exposure (e.g., utility services) we find that the use-side incidence can dominate leading to regressive distribution of regulatory costs. Finally, we find that the common practice of vintage differentiation, whereby only new sources of pollution are covered, can cause a significantly more regressive distribution of costs, all else equal.

This paper is part of the Environmental Economics Working Paper Series.

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