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Optimal mix of emissions taxes and cap-and-trade

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  • Mandell, Svante

Abstract

In practice, different emitters of a particular pollutant are sometimes subjected to different control mechanisms. This paper focuses on the situation where a part of the economy is regulated by a cap-and-trade program, while the rest is subjected to an emissions tax. Using an extended version of Weitzman's 'Prices vs. Quantities' model [M.L. Weitzman, Prices vs. quantities, Revi. Econ. Stud. 41 (1974) 477-491], we analyze the conditions under which this is superior, from an efficiency point of view, to subjecting the whole economy to either of these control mechanisms. The paper addresses a crucial trade-off between two sources of efficiency loss, one due to cost-effectiveness issues and another due to emissions volume. This trade-off determines the optimal size of each sector. It is shown that the size of the taxed sector, at an optimum, increases with the relative steepness of the aggregate marginal abatement cost function.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 56 (2008)
Issue (Month): 2 (September)
Pages: 131-140

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Handle: RePEc:eee:jeeman:v:56:y:2008:i:2:p:131-140

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Web page: http://www.elsevier.com/locate/inca/622870

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References

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  1. M. L. Weitzman, 1973. "Prices vs. Quantities," Working papers 106, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Laffont, Jean Jacques, 1977. "More on Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 177-82, February.
  3. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future.
  4. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
  5. Louis Kaplow & Steven Shavell, 1997. "On the Superiority of Corrective Taxes to Quantity Regulation," NBER Working Papers 6251, National Bureau of Economic Research, Inc.
  6. Watson, William D. & Ridker, Ronald G., 1984. "Losses from effluent taxes and quotas under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 11(4), pages 310-326, December.
  7. Yohe, Gary W., 1981. "Should sliding controls be the next generation of pollution controls?," Journal of Public Economics, Elsevier, vol. 15(2), pages 251-267, April.
  8. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  9. Ireland, N J, 1977. "Ideal Prices vs. Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 44(1), pages 183-86, February.
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Citations

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Cited by:
  1. Jack Pezzey & Frank Jotzo, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Environmental Economics Research Hub Research Reports 1068, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  2. Zhe Li & Shouyong Shi, 2010. "Emission Tax or Standard? The Role of Productivity Dispersion," Working Papers tecipa-409, University of Toronto, Department of Economics.
  3. Krysiak, Frank C. & Oberauner, Iris Maria, 2010. "Environmental policy à la carte: Letting firms choose their regulation," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 221-232, November.
  4. Heindl, Peter, 2012. "Mitigating market power under tradeable permits," ZEW Discussion Papers 12-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Shouyong Shi & Zhe Li, 2010. "Emission Tax or Standard: The Roles of Productivity Dispersion and Abatement," 2010 Meeting Papers 587, Society for Economic Dynamics.
  6. Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, vol. 37(12), pages 5192-5207, December.
  7. Ambec, Stefan & Coria, Jessica, 2011. "Prices vs Quantities with Multiple Pollutants," Working Papers in Economics 517, University of Gothenburg, Department of Economics.
  8. Oskar Lecuyer & Philippe Quirion, 2012. "Can Uncertainty Justify Overlapping Policy Instruments to Mitigate Emissions?," Post-Print hal-00801927, HAL.

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