Geoscience Reference
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A specifi c example would be a government appliance regulation.
Suppose that the government mandates that furnaces reduce their fuel
use per unit of heating. A low-fuel furnace costs $500 more in capital
and fuel costs over its lifetime. It also reduces lifetime CO
2
emissions by
10 tons. We would therefore say that the cost of the CO
2
reduction is
$50 per ton.
Note that we do not count taxes as effi ciency losses. Suppose that
there is a $25 per ton carbon tax. If my total direct and indirect CO
2
use
is 10 tons per year, I would pay $250 in carbon taxes (not only directly,
but also indirectly as higher costs embedded in my purchases of goods
and services). However, this cost is not a deadweight loss but a transfer.
The government gets $250 of revenue and can spend that on govern-
mental services or serve up $250 in tax cuts. If I pay $250 of carbon
taxes and my income taxes are reduced by $250, then my real income is
essentially back where it started. This shows why to a fi rst approxima-
tion we should not count the tax revenues as a deadweight loss.
2
A REGULATORY EXAMPLE: AUTOMOBILE FUEL
EFFICIENCY STANDARDS
It will be useful to begin with an example of the regulatory ap-
proach: automobile fuel effi ciency standards. They are used in virtually
every major country; they are popular; and they are costly.
The most recent standard issued by the Obama administration in
2012 was a good example of the pros and cons of a regulatory approach.
It set standards that would decrease automotive CO
2
emissions in new
cars over the 2012-2025 period by as much as 40 percent. The esti-
mated technology costs were $120 billion in higher costs of cars and
light trucks over the 2011-2015 model years.
The implementation is complicated. The standards differ by vehicle
category: Small cars will be required to get 52 miles per gallon (mpg),
while large light trucks (big SUVs and pickups) will only be required to
get 38 mpg. Such an arrangement creates a perverse incentive for people
to buy large SUVs rather than small cars compared to a standard where
all cars and SUVs have the same fuel effi ciency standard. Thus different
standards undermine the effectiveness of the fuel effi ciency mandate.
