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Prices vs. Quantities with fiscal cushioning

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  • Rohling, Moritz
  • Ohndorf, Markus

Abstract

Enforcement of international environmental quantity regulations (e.g. tradable pollution permits) is often expected to be stricter than that of price regulations (e.g. emission taxes). While both instruments provide opportunities for misrepresenting actual pollution, enforcement of international price-based instruments is additionally hampered by potential fiscal cushioning, i.e. an adjustment of domestic fiscal policies offsetting the tax incentive to reduce emission reductions. The present paper extends the formal debate on Prices vs. Quantities by including the risk of fiscal cushioning. We find the level of the marginal benefit curve and the variance of costs become key elements for instrument choice and can render quantity regulations strictly preferable. Remarkably, in the latter case, the slopes of the marginal curves do not affect optimal instrument choice. Numerical calculations, using data taken from the international climate policy context, support the potential dominance of quantity regulations found in our formal analysis.

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Bibliographic Info

Article provided by Elsevier in its journal Resource and Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 169-187

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Handle: RePEc:eee:resene:v:34:y:2012:i:2:p:169-187

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Web page: http://www.elsevier.com/locate/inca/505569

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Keywords: Instrument choice; Incomplete enforcement; Uncertainty; Environmental regulation;

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References

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Cited by:
  1. Blasch, Julia & Farsi, Mehdi, 2012. "Retail demand for voluntary carbon offsets – a choice experiment among Swiss consumers," MPRA Paper 41259, University Library of Munich, Germany.
  2. Michele Baggio, 2012. "The Optimal Management of a Natural Resource with Switching Dynamics," IED Working paper 12-19, IED Institute for Environmental Decisions, ETH Zurich.
  3. Salvatore Di Falco & Marcella Veronesi, 2011. "On Adaptation to Climate Change and Risk Exposure in the Nile Basin of Ethiopia," IED Working paper 11-15, IED Institute for Environmental Decisions, ETH Zurich.
  4. Thomas Epper & Helga Fehr-Duda & Renate Schubert, 2011. "Energy-Using Durables: The Role of Time Discounting in Investment Decisions," IED Working paper 11-16, IED Institute for Environmental Decisions, ETH Zurich.
  5. Thomas Bernauer & Lena Maria Schaffer, 2010. "Climate Change Governance," IED Working paper 10-12, IED Institute for Environmental Decisions, ETH Zurich.
  6. Justin Caron & Markus Ohndorf, 2010. "Irreversibility and Optimal Timing of Climate Policy," IED Working paper 10-14, IED Institute for Environmental Decisions, ETH Zurich.
  7. Ines Kapphan & Pierluigi Calanca & Annelie Holzkaemper, 2011. "Climate Change, Weather Insurance Design and Hedging Effectiveness," IED Working paper 11-17, IED Institute for Environmental Decisions, ETH Zurich.
  8. Markus Ohndorf, 2010. "Optimal Monitoring for project-based Emissions Trading Systems under incomplete Enforcement," IED Working paper 10-13, IED Institute for Environmental Decisions, ETH Zurich.

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