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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. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 37(1), pages 52-84, January.
  2. Louis Kaplow & Steven Shavell, 2002. "On the Superiority of Corrective Taxes to Quantity Regulation," American Law and Economics Review, Oxford University Press, Oxford University Press, vol. 4(1), pages 1-17, January.
  3. Malcomson, James M, 1978. "Prices vs. Quantities: A Critical Note on the Use of Approximations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 45(1), pages 203-07, February.
  4. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  5. Yohe, Gary W., 1981. "Should sliding controls be the next generation of pollution controls?," Journal of Public Economics, Elsevier, Elsevier, vol. 15(2), pages 251-267, April.
  6. Laffont, Jean Jacques, 1977. "More on Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(1), pages 177-82, February.
  7. Peter Cramton & Suzi Kerr, 2002. "Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Papers of Peter Cramton, University of Maryland, Department of Economics - Peter Cramton 02eptc, University of Maryland, Department of Economics - Peter Cramton, revised 06 May 2002.
  8. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, 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, Wiley Blackwell, vol. 44(1), pages 183-86, February.
  10. Watson, William D. & Ridker, Ronald G., 1984. "Losses from effluent taxes and quotas under uncertainty," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 11(4), pages 310-326, December.
  11. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, American Economic Association, vol. 68(4), pages 683-91, September.
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Cited by:
  1. Heindl, Peter, 2012. "Mitigating market power under tradeable permits," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 12-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Zhe Li & Shouyong Shi, 2010. "Emission Tax or Standard? The Role of Productivity Dispersion," Working Papers, University of Toronto, Department of Economics tecipa-409, University of Toronto, Department of Economics.
  3. Shouyong Shi & Zhe Li, 2010. "Emission Tax or Standard: The Roles of Productivity Dispersion and Abatement," 2010 Meeting Papers, Society for Economic Dynamics 587, Society for Economic Dynamics.
  4. Ambec, Stefan & Coria, Jessica, 2011. "Prices vs Quantities with Multiple Pollutants," Working Papers in Economics, University of Gothenburg, Department of Economics 517, University of Gothenburg, Department of Economics.
  5. Oskar Lecuyer & Philippe Quirion, 2013. "Can Uncertainty Justify Overlapping Policy Instruments to Mitigate Emissions?," Working Papers, Chaire Economie du Climat 1301, Chaire Economie du Climat.
  6. Peter J. Wood & Peter Heindl & Frank Jotzo & Andreas Löschel, 2013. "Linking Price and Quantity Pollution Controls under Uncertainty," CCEP Working Papers, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University 1302, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  7. Mandell, Svante, 2010. "Carbon Emission Values in Cost Benefit Analyses," Working Papers, Swedish National Road & Transport Research Institute (VTI) 2010:4, Swedish National Road & Transport Research Institute (VTI).
  8. Pezzey, John C.V. & Jotzo, Frank, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Research Reports, Australian National University, Environmental Economics Research Hub 95049, Australian National University, Environmental Economics Research Hub.
  9. repec:hal:wpaper:hal-00866440 is not listed on IDEAS
  10. Krysiak, Frank C. & Oberauner, Iris Maria, 2010. "Environmental policy à la carte: Letting firms choose their regulation," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 60(3), pages 221-232, November.
  11. Blyth, William & Bunn, Derek & Kettunen, Janne & Wilson, Tom, 2009. "Policy interactions, risk and price formation in carbon markets," Energy Policy, Elsevier, Elsevier, vol. 37(12), pages 5192-5207, December.
  12. Pezzey, John C.V. & Jotzo, Frank, 2012. "Tax-versus-trading and efficient revenue recycling as issues for greenhouse gas abatement," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 64(2), pages 230-236.

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