Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design

We give empirical welfare results for global greenhouse gas emission control, using the first multiparty model to combine tax-versus-trading under uncertainties with revenue recycling. Including multiple parties greatly reduces the welfare advantage of an emissions tax over emissions (permit) trading in handling abatement-cost uncertainties, from that shown by existing, single-party literature. But a tax has a different, much bigger advantage, from better handling uncertainties in business-as-usual emissions. Either mechanism's free emissions share, from tax thresholds or free permits, which lowers its possible welfare gain from revenue recycling, may however dominate any tax-versus-trading advantage. Moreover, political and practical constraints, such as the political unacceptability of no free emissions, the institutional unavailability of efficient emissions tax thresholds, and the unpopularity of recycling revenue as conventional tax cuts, make ideal welfare maximisation a poor guide for mechanism choice; and at optimal prices, trading currently tends to outperform taxation.


Issue Date:
2010-09
Publication Type:
Report
DOI and Other Identifiers:
ISSN 1835-9728 (Other)
PURL Identifier:
http://purl.umn.edu/95049
Page range:
1-42
Total Pages:
42
JEL Codes:
D810; H230; Q580
Series Statement:
Environmental Economics Research Hub Research Reports
68




 Record created 2017-04-01, last modified 2017-08-25

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