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Competitive dominance of emission trading over Pigouvian taxation in a globalized economy

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  • Sim, Seung-Gyu
  • Lin, Hsuan-Chih

Abstract

This paper examines the welfare implication of adopting a Pigouvian taxation scheme or emission trading scheme. In a globalized economy with international trade and cross-border pollution, we show that adopting the latter is the strict dominant strategy of each country, and global welfare is maximized when all countries adopt the latter, because emission trading incentivizes the other country to tighten its environmental regulation without concern for excessive shrinkage of domestic production and aggravation of cross-border pollution.

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  • Sim, Seung-Gyu & Lin, Hsuan-Chih, 2018. "Competitive dominance of emission trading over Pigouvian taxation in a globalized economy," Economics Letters, Elsevier, vol. 163(C), pages 158-161.
    • Handle: RePEc:eee:ecolet:v:163:y:2018:i:c:p:158-161
    DOI: 10.1016/j.econlet.2017.12.015
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    1. Lawrence H. Goulder & Andrew R. Schein, 2013. "Carbon Taxes Versus Cap And Trade: A Critical Review," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 4(03), pages 1-28.
    2. Martin L. Weitzman, 1974. "Prices vs. Quantities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(4), pages 477-491.
    3. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    4. Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
    5. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kumar, Surender & Managi, Shunsuke & Jain, Rakesh Kumar, 2020. "CO2 mitigation policy for Indian thermal power sector: Potential gains from emission trading," Energy Economics, Elsevier, vol. 86(C).
    2. Ritter, Hendrik & Zimmermann, Karl, 2019. "Cap-and-Trade Policy vs. Carbon Taxation: Of Leakage and Linkage," EconStor Preprints 197796, ZBW - Leibniz Information Centre for Economics.
    3. Limei Sun & Jinyu Wang & Zhicheng Wang & Leorey Marquez, 2020. "Mechanism of Carbon Finance’s Influence on Radical Low-Carbon Innovation with Evidence from China," Sustainability, MDPI, vol. 12(18), pages 1-14, September.
    4. Ruyin Long & Qin Zhang & Hong Chen & Meifen Wu & Qianwen Li, 2020. "Measurement of the Energy Intensity of Human Well-Being and Spatial Econometric Analysis of Its Influencing Factors," IJERPH, MDPI, vol. 17(1), pages 1-21, January.
    5. Sungwan Hong & Seung-Gyu Sim, 2018. "Inelastic Supply of Fossil Energy and Competing Environmental Regulatory Policies," Sustainability, MDPI, vol. 10(2), pages 1-17, January.
    6. Tang, Ling & Wang, Haohan & Li, Ling & Yang, Kaitong & Mi, Zhifu, 2020. "Quantitative models in emission trading system research: A literature review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    Emission trading scheme; Pigouvian taxation; International trade; Cross-border pollution;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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