Grantee Research Project Results
Final Report: A Framework to Compare Polices for Source Reduction
EPA Grant Number: R824740Title: A Framework to Compare Polices for Source Reduction
Investigators: Fullerton, Don
Institution: The University of Texas at Austin
EPA Project Officer: Hahn, Intaek
Project Period: October 1, 1995 through September 30, 1997
Project Amount: $88,784
RFA: Incentives and Impediments to Pollution Prevention (1995) RFA Text | Recipients Lists
Research Category: Sustainable and Healthy Communities , Pollution Prevention/Sustainable Development
Objective:
The project undertook research in three lines of inquiry. First, a simple general equilibrium model was developed and used to analyze and compare the effects of disposal-content fees, subsidies for recyclable designs, unit-pricing of household disposal, deposit-refund systems, and manufacturer "take-back" requirements. These alternative policies for "green design" might induce firms to reduce packaging or make products more recyclable. A second line of inquiry relates to a "two-part instrument." The purpose of this research is to build relatively simple general equilibrium models to demonstrate the general equivalence between a pollution tax and the combination of a presumptive tax (i.e., that imposed which presumes all production uses a dirty technology or all consumption goods become waste) and environmental subsidy. The environmental subsidy is then provided only to the extent that production uses a cleaner technology or that consumption goods are recycled.A third line of inquiry is related to the "double-dividend hypothesis" (DDH), which suggests that increased taxes on polluting activities can provide two kinds of benefits: an improvement in the environment, and an improvement in economic efficiency from the use of environmental tax revenues to reduce other taxes, such as income taxes that distort labor supply and saving decisions.
This research makes four main points. First, the validity of the DDH logically cannot be settled as a general matter. Second, the focus on revenue in this literature is misplaced. Three policies are demonstrated that can have equivalent impacts on the environment and on labor supply, when in reality, revenue is raised from the environmental component of the reform, another loses revenue, and a third has no revenue associated with it. Third, what matters is the creation of privately held scarcity rents. Policies that raise product prices through some restriction on behavior may create scarcity rents. Unless those rents are captured by the government, such policies are less efficient at ameliorating an environmental problem than are policies that do not create rents. Finally, the distinction is made between two types of command and control regulations on the basis of whether they create scarcity rents.
Summary/Accomplishments (Outputs/Outcomes):
First, if market signals can be corrected through the use of appropriate disposal charges, then it is demonstrated that consumers will induce firms to use less packaging and to design products for easier subsequent recycling. If market signals cannot be corrected in this manner, however, then welfare can be improved by policies directed toward the firm. The solution may involve a subsidy to recycling, or, if that is not possible, a subsidy to recyclability. In the extended model, with disaggregate commodities of differing toxicity, separate output taxes and recycling subsidies are shown to address hazardous and nonhazardous generation of waste.Second, desirable incentive effects of a waste-end tax can be matched exactly, without the measurement and enforcement problems, by the use of a "two-part instrument." The deposit- refund system is one such example. To see this, the generation of waste is viewed as an input to production, with its own marginal product such as labor, capital, and materials. Then the tax need not apply directly to the unobservable wastes, because the exact same changes in relative prices can be achieved through a tax on an observable transaction, such as the purchase of the output, in combination with a subsidy to other observable transactions, namely the purchase of all other inputs to production except waste.
The intuition is fairly simple and follows the idea that the waste-end tax has two intended incentive effects. First, the tax raises production costs and makes the good more expensive, so the "output effect" reduces production and, therefore, consumption of the good. Second, the waste-end tax makes the waste more expensive relative to other inputs, so the "substitution effect" reduces waste per unit. By analogy, the two-part instrument accomplishes the same effects separately. The first part imposes a tax on the output, which reduces production and consumption of the good. This tax on output is equivalent to a tax at the same rate on all inputs to production, including labor, capital, materials, and waste. The second part subsidizes all nonwaste inputs, which makes waste relatively more expensive and reduces waste per unit of output.
Third, debates about DDH have focused on whether an environmental policy raises revenue that can be used to cut other distorting taxes. Welfare results are derived for alternative policies in a series of analytical general equilibrium models with clean and dirty goods that might be produced using emissions as well as other resources, in the presence of other preexisting distortions such as labor taxes or even monopoly pricing. The same welfare effects of environmental protection can be achieved, without exacerbating the labor distortion, through taxes that raise revenue, certain command and control regulations that raise no revenue, and subsidies that cost revenue. Instead, policies that generate privately retained scarcity rents exacerbate the preexisting labor tax distortion. These rents raise the cost of production, raise equilibrium output prices, and thus reduce the actual net wage. Such policies include both quantity-restricting command and control policies and certain marketable permit policies.
Journal Articles on this Report : 4 Displayed | Download in RIS Format
Other project views: | All 6 publications | 5 publications in selected types | All 4 journal articles |
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Type | Citation | ||
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Fullerton D. Environmental levies and distortionary taxation: Comment. American Economic Review 1997;87(1):245-251 |
R824740 (Final) |
not available |
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Fullerton D, Wu W. Policies for green design. Journal of Environmental Economics and Management 1998;36:131-148. |
R824740 (Final) |
not available |
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Fullerton D. The Case for a Two-Part Instrument: Presumptive Tax and Environmental Subsidy. NBER Working Paper 1997/04//;():No. W5993 |
R824740 (Final) |
not available |
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Fullerton D, Metcalf G. Environmental Taxes and the Double-Dividend Hypothesis: Did You Really Expect Something for Nothing?. NBER Working Paper 1997/09//;():No.W6199 |
R824740 (Final) |
not available |
Supplemental Keywords:
green design, source reduction, household waste, disposal content, deposit refund, green dot, packaging tax, recycling subsidy, two-part instrument, double dividend hypothesis, second best taxes, green taxes, environmental taxation, preexisting distortions., Scientific Discipline, Sustainable Industry/Business, cleaner production/pollution prevention, Economics, Social Science, analytical general equilibrium model, green design, recyclable design, cost benefit, source reduction policies, product life cycle, packaging, incentives and impedimentsRelevant Websites:
http://www.eco.utexas.edu/faculty/FullertonProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.