Horizontal Equity Effects in Energy Regulation

July 2018–Carolyn Fischer and William. A. Pizer

Choices in energy regulation, particularly whether and how to price externalities, can have widely different distributional consequences both across and within income groups. Traditional welfare theory focuses largely on effects across income groups; such “vertical equity” concerns can typically be addressed by a progressive redistribution of emissions revenues. This paper reviews alternative economic perspectives that give rise to equity concerns within income groups, or “horizontal equity,” and suggests operational measures. It applies those measures to a stylized model of pollution regulation in the electricity sector. In addition, it looks for ways to present the information behind those measures directly to stakeholders. It shows how horizontal equity concerns might overshadow efficiency concerns in this context.