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Efficient and Equitable Policy Design: Taxing Energy Use or Promoting Energy Savings?

Abstract:
Should energy use be lowered by using broad-based taxes or through promoting and mandating energy savings through command-and-control measures and targeted subsidies? We integrate a micro-simulation analysis, based on a representative sample of 9,734 households of the Swiss population, into a numerical general equilibrium model to examine the efficiency and equity implications of these alternative regulatory approaches. We find that at the economy-wide level taxing energy is five times more cost-effective than promoting energy savings. About 36% of households gain under tax-based regulation while virtually all households are worse off under a promotion-based policy. Tax-based regulation, however, yields a substantial dispersion in household-level impacts whereas heterogeneous household types are similarly affected under a promotion-based approach. Our analysis points to important trade-offs between efficiency and equity in environmental policy design.

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Energy Specializations: Energy and the Environment – Policy and Regulation; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Environmental policy, Instrument choice, Market-based instruments, Command-and-control, Efficiency, Equity, Heterogeneous households, Microsimulation, General equilibrium

DOI: 10.5547/01956574.40.1.flan

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Published in Volume 40, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.