The Distributional Impact
of Climate Policy
by
Dale Jorgenson – Harvard University
Daniel Slesnick – University of Texas, Austin
Peter Wilcoxen – Syracuse University
Richard Goettle – Northeastern University
Mun Ho – Resources for the Future
http://www.economics.harvard.edu/faculty/jorgenson
Energy Policy Symposium – Resources for the Future
Washington, DC – January 20-21, 2010
The Distributional Impact
of Climate Policy
Intertemporal General Equilibrium Model
Modeling Allocation of Full Consumption
Equivalent Variation of Full Wealth
Regressivity of Climate Policy Based on
Cap-and-Trade
IGEM
• Intertemporal general equilibrium model.
• Unified accounting framework consistent with the National
Income and Product Accounts and the Consumer Expenditure
Survey.
• Dynamics driven by population growth, capital accumulation,
productivity growth in each industry.
• Production in 35 industries generates 35 commodities.
Producers substitute among capital, labor and all 35 commodity
inputs.
• Aggregate consumption demand derived from aggregating over
individual household demands for 244 household types, Each
household utility function includes both goods and leisure.
HOUSEHOLD FULL CONSUMPTION MODEL:
DEMOGRAPHIC GROUPS
Number of children
0,1,2, 3 or more
Number of adults
1,2, 3 or more
Region
Northeast, Midwest, South, West
Location
Urban, Rural
Gender of head
Male, Female
Race of head
White, nonwhite
TIER STRUCTURE
OF HOUSEHOLD DEMAND
Full consumption = U (Nondurables, Capital services,
Services, Leisure)
Nondurables = U (Energy, Food, Consumer Goods)
Energy = U (gasoline, coal & fuel oil, electricity, gas)
HOUSEHOLD DEMAND
Indirect utility function of prices (pk) and total expenditures (mk )
pk 1 pk H
pk
pk
 ln Vk   0   ln
 2 ln
' B ln
 ln
' BA Ak
mk
mk
mk
mk
H
Household k demands in share form:
1
wk 
( H  B H ln pk   ' B H ln mk  BA Ak )
D( pk )
AGGREGATE DEMAND
n m w
w
n m
k
k
k
k
k
k
k
1
 H  B H ln p  ιB H  d  BA L 

D( p )
PRICE AND INCOME ELASTICITIES
Uncompensated
Price Elasticity
Compensated
Price Elasticity
Expenditure
Elasticity
Nondurables
-0.727
-0.651
0.673
Capital Services
-1.192
-1.084
0.902
Consumer Services
-0.561
-0.49
1.067
0.014
-0.305
1.063
-0.032
0.713
-2.486
Leisure
Labor Supply
FULL EXPENDITURE AND
HOUSEHOLD BUDGET SHARES
Full
Nondurables
Capital
Services
Leisure
Expenditures ($)
7500
0.208
0.151
0.055
0.586
25000
0.164
0.137
0.060
0.626
75000
0.123
0.124
0.065
0.693
150000
0.098
0.116
0.068
0.713
275000
0.075
0.108
0.071
0.718
350000
0.066
0.106
0.072
0.716
EQUIVALENT VARIATION
IN FULL WEALTH
For each dynasty d, the intertemporal expenditure function of all
future prices (pt), discount factors (γt), and utility (Vd), :

 D0 t N dt Pt
1
t
ln  d ({ pt },{ t }, Vd )   S ln R    Dt ln  t
s 
t 0
  Dt P0


  Vd 


The equivalent variation due to a policy that changes the price
profile from p0 to p1, and utility from V0 to V1 :
Wd   d ({ pt0 },{ t0 }, Vd1 )   d ({ pt0 },{ t0 }, Vd0 )
Macroeconomic Impacts of HR 2454
(% change from base case)
2012
2030
2050
-0.43
-0.96
-1.70
Consumption
-0.08
-0.42
-0.91
Investment
-0.51
-0.88
-1.57
Government
-0.14
-0.31
-0.58
Exports
-1.32
-2.53
-4.16
Imports
0.31
0.24
-0.20
0.07
0.02
-0.06
Capital Stock
-0.18
-0.70
-1.29
Labor Demand (Labor Supply)
-0.37
-0.66
-1.10
0.16
0.28
0.42
Real GDP
Household Real Full Consumption of
Goods, Services and Leisure
Leisure Demand
Marginal Abatement Cost Curves
($2000, mil. metric tons CO2)
Household Welfare Effects
(244 household types)
Decomposition of Household Welfare Effects
Household Welfare Effects by Family Size
Household Welfare Effects by Region
Household Welfare Effects
by Gender and Race of Head
Household Welfare Effects
by Type of Residence
SUMMARY AND CONCLUSION
• Climate Policy Is Regressive When Welfare
Measurement Is Based on Full Wealth.
• Allocation of Full Wealth Requires Econometric
Modeling of Consumer Expenditure.
• Consumer Behavior Is the Key Component of the
Intertemporal General Equilibrium Model for Policy
Evaluation.