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A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities

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  • Arthur Caplan

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Abstract

This paper provides an answer to the question: Are emission taxes an efficient and self-enforcing mechanism to control correlated externality problems? By “correlated externalities” we mean multiple pollutants that are jointly produced by a single source but cause differentiated regional and global externalities. By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. This mechanism incorporates sequential decision making among the jurisdictions and therefore determines an equilibrium based on the concept of subgame perfection. We find that, unlike joint domestic and international tradable permit markets, joint emission taxes and a hybrid scheme of permits and taxes are neither efficient nor self-enforcing. Copyright Springer 2006

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File URL: http://hdl.handle.net/10.1007/s10640-006-0010-3
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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 34 (2006)
Issue (Month): 4 (August)
Pages: 471-492

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Handle: RePEc:kap:enreec:v:34:y:2006:i:4:p:471-492

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Web page: http://www.springerlink.com/link.asp?id=100263

Related research

Keywords: correlated externalities; hybrid scheme; joint emission taxes; joint permits; C72; D62; D78; H41; H77; Q28;

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References

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  1. Caplan, Arthur J. & Silva, Emilson C.D., 2005. "An efficient mechanism to control correlated externalities: redistributive transfers and the coexistence of regional and global pollution permit markets," Journal of Environmental Economics and Management, Elsevier, vol. 49(1), pages 68-82, January.
  2. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  3. Michael Finus, 2004. "Modesty Pays: Sometimes!," Working Papers 2004.68, Fondazione Eni Enrico Mattei.
  4. Carraro, Carlo & Siniscalco, Domenico, 1991. "Strategies for the International Protection of the Environment," CEPR Discussion Papers 568, C.E.P.R. Discussion Papers.
  5. Michael Finus & Juan-Carlos Altamirano-Cabrera & Ekko Ierland, 2005. "The effect of membership rules and voting schemes on the success of international climate agreements," Public Choice, Springer, vol. 125(1), pages 95-127, July.
  6. Peter Michaelis, 1992. "Global warming: Efficient policies in the case of multiple pollutants," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(1), pages 61-77, January.
  7. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  8. Shrestha, Ratna K., 2001. "The choice of environmental policy instruments under correlated uncertainty," Resource and Energy Economics, Elsevier, vol. 23(2), pages 175-185, April.
  9. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-91, September.
  10. Hoel, Michael, 1992. "Carbon taxes : An international tax or harmonized domestic taxes?," European Economic Review, Elsevier, vol. 36(2-3), pages 400-406, April.
  11. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
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Citations

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Cited by:
  1. Legras, Sophie, 2010. "Managing correlated stock externalities: water taxes with a pinch of salt," Environment and Development Economics, Cambridge University Press, vol. 15(03), pages 275-292, June.
  2. Woodward, Richard T., 2011. "Double-dipping in environmental markets," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 153-169, March.
  3. Zylicz, Tomasz, 2010. "Goals and Principles of Environmental Policy," International Review of Environmental and Resource Economics, now publishers, vol. 3(4), pages 299-334, May.

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