When Standards Have Better Distributional Consequences Than Carbon Taxes

57 Pages Posted: 14 Dec 2020 Last revised: 25 Feb 2021

See all articles by Jiaxin Zhao

Jiaxin Zhao

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; University of Oxford - Blavatnik School of Government; University of Oxford - Environmental Change Institute (ECI)

Linus Mattauch

University of Oxford

Date Written: November 29, 2020

Abstract

Carbon pricing is the efficient instrument to reduce emissions. Nevertheless, the geographical and sectoral coverage of substantial carbon pricing remains low, often due to concerns that it may increase economic inequality. Regulatory standards such as fuel economy standards are more popular. Could it be the case that they have an equity advantage over carbon pricing? We develop two formal models to identify economic situations in which standards have better distributional consequences. First, we prove that an efficiency standard can be more equitable than carbon pricing when consumers exhibit a preference for high-carbon technology attributes. Evidence from the US vehicle market confirms this finding. Second, we show theoretically, and by means of a numerical application to the Chinese transport sector, that intensity standards are preferable when richer households consume more goods with high carbon intensity. Our results hold when the revenue from carbon pricing is not very progressively redistributed. These insights may help advance decarbonisation when pricing remains unpopular.

Keywords: Incidence, Distributional effects, Carbon pricing, Efficiency and intensity standards

JEL Classification: H22, H23, Q52, Q54

Suggested Citation

Zhao, Jiaxin and Zhao, Jiaxin and Mattauch, Linus, When Standards Have Better Distributional Consequences Than Carbon Taxes (November 29, 2020). Available at SSRN: https://ssrn.com/abstract=3739546 or http://dx.doi.org/10.2139/ssrn.3739546

Jiaxin Zhao (Contact Author)

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

University of Oxford - Environmental Change Institute (ECI) ( email )

South Parks Road
Oxford, OX1 3QY
United Kingdom

Linus Mattauch

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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