Targeting Distributional Impacts in the Presence of Behavioral Responses: Lessons from Maritime Emissions Regulation

Targeting distributional impacts is gaining importance in the design of environmental policy. To achieve this, policymakers are adopting advances in air transport models to predict the benefits of air emissions regulation. These models offer policymakers accuracy in the spatial distribution of ambient air quality improvements for a given emissions reduction, but they do not take into account behavioral responses to environmental policies. We consider how the failure to account for behavioral responses when making policy predictions may have important implications for the ultimate distributional impact of such policies. We compare the distributional impacts of maritime emission regulation predicted from the policymaker’s air transport model with the realized distributional impacts. We then decompose the prediction error into two components: model error (whereby the predictions of air transport models fail to account for behavioral responses of polluting firms) and sorting error (whereby the targeted population migrates).