As national unemployment rate hovers just under 8 percent.”

As mentioned above, the dependence on coal in
Indiana is quite significant (, and therefore, the impact of these market-based policies
will also be greater in Indiana than states that have very low dependence on
coal. However, costs of market-based policies are not evenly distributed for
everyone. Workers and investors in emission-intensive industries of Indiana
would see the greatest decrease in demand for their products and hence would
bear relatively large burdens when the economy adjusted to the tax.

These policies will make both producing and
using carbon-intensive products more expensive, also leading to an increase in
the costs of electricity and transportation that involve relatively copious
amounts of CO2 emissions. While these cost increases would
provide an incentive for companies to manufacture their products in ways that
resulted in fewer CO2 emissions, it is important to note in case of a
carbon tax, that companies that are responsible
for collecting and paying the tax dollars are not necessarily impacted by the
carbon tax and can simply pass some part of their costs to customers, smaller
businesses and households.

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According to a study by NERA
Economic Consulting and the National Association of Manufacturers (NAM), “residents of Indiana will pay
more for natural gas, electricity, gasoline and other energy commodities. This
may be particularly bad  for
manufacturers consuming most of the energy supply, and for low-income families
struggling to get by as the national unemployment rate hovers just under 8
percent.” Furthermore, “many Indiana companies that compete internationally
will be placed at a disadvantage as their foreign competitors operate without
similar costs.”


Coming to the impacts on
common citizens, it is important to keep into consideration low income
households, because low income families spend a huge chunk of their incomes on
energy. (Slide 23, lecture B1 (2b)).

It is possible to offset
these impacts caused by market policies on poor, if revenues generated from
policy are used to offer rebates to the poor. For example, under the cap and dividend system, public revenues
raised from the sale of pollution credits is rebated to citizens or to
consumers as a subsidy for increasing efficiency. Low-income families may get disproportionately hit by
the carbon tax as well, which is why it is important to offset the pain. Without
accounting for how the revenues from a carbon tax would be used, such a tax
would have a negative effect on the economy. (

However, though this can
be achieved through a lump sum rebate, a lump sum rebate may not be
economically efficient and therefore the revenues should be recycled to take
care of distortionary taxes like personal income tax.


Similar concerns lie
with an aggressive cap-and-trade program. Under the auction approach, customers
in Indiana will be paying much more due to coal’s higher emissions

A cap-and-trade program
may soften this blow if it would initially provide for more free allowances.
Providing a larger percentage of free allowances rather than a high percentage
of auctioned allowances would give time for proven carbon capture technology to
develop over a period of several years. Utilities and customers could work
together to reduce emissions during this period, such as tapping more renewable
resources and implementing energy efficiency programs, while waiting for carbon
capture and sequestration technology to emerge. The number of free allowances
can then gradually be reduced over time to ensure utilities and other emitters
are indeed focused on reducing emissions.