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Cap-and-trade or carbon taxes? The feasibility of enforcement and the effects of non-compliance

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  • Jon Hovi

    ()

  • Bjart Holtsmark

Abstract

One of the proposed alternatives to Kyoto’s cap-and-trade approach is a regime based on an internationally harmonized carbon tax. In this paper, we consider and compare the enforcement problems associated with a tax regime and a cap-and-trade regime, respectively. The paper tries to convey two main points. First, both types of regime require an effective enforcement mechanism. However, such a mechanism is unlikely to be adopted as part of a regime with full participation, because the political process leading up to its adoption tends to water down the enforcement mechanism to a point where it no longer has much bite. And even if this is somehow avoided, countries expecting compliance to be difficult or costly will almost certainly decline to sign – not to mention ratify – the resulting agreement. Second, the implications of non-compliance in a tax regime differ in important ways from the corresponding implications in a cap-and-trade regime. In a cap-and-trade regime emissions trading can make inaction legitimate for buyers of emission permits. In particular, overselling of permits by one (or a few) permit exporting countries might completely undermine the regime’s environmental effect. In a tax regime, by contrast, one country's non-compliance can not make inaction by other countries legitimate. It follows that an agreement based on a harmonized carbon tax will always have some effect, provided that at least one country complies.

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File URL: http://hdl.handle.net/10.1007/s10784-006-9002-6
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Bibliographic Info

Article provided by Springer in its journal International Environmental Agreements: Politics, Law and Economics.

Volume (Year): 6 (2006)
Issue (Month): 2 (June)
Pages: 137-155

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Handle: RePEc:spr:ieaple:v:6:y:2006:i:2:p:137-155

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Web page: http://www.springer.com/economics/journal/10784

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Related research

Keywords: Climate regime; Kyoto Protocol; Carbon taxes; Enforcement; Compliance; Political feasibility;

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References

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  1. Jon Hovi & Tora Skodvin & Steinar Andresen, 2003. "The Persistence of the Kyoto Protocol: Why Other Annex I Countries Move on Without the United States," Global Environmental Politics, MIT Press, vol. 3(4), pages 1-23, November.
  2. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
  3. Hoel, Michael & Karp, Larry, 2001. "Taxes and quotas for a stock pollutant with multiplicative uncertainty," Journal of Public Economics, Elsevier, vol. 82(1), pages 91-114, October.
  4. Haites, Erik & Missfeldt, Fanny, 2004. "Liquidity implications of a commitment period reserve at national and global levels," Energy Economics, Elsevier, vol. 26(5), pages 845-868, September.
  5. Christoph Bohringer, 2002. "Climate Politics from Kyoto to Bonn: From Little to Nothing?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 51-71.
  6. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
  7. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  8. Pizer, William, 1997. "Prices vs. Quantities Revisited: The Case of Climate Change," Discussion Papers dp-98-02, Resources For the Future.
  9. Joseph E. Aldy & Scott Barrett & Robert N. Stavins, 2003. "Thirteen Plus One: A Comparison of Global Climate Policy Architectures," Working Papers 2003.64, Fondazione Eni Enrico Mattei.
  10. Downs, George W. & Rocke, David M. & Barsoom, Peter N., 1996. "Is the good news about compliance good news about cooperation?," International Organization, Cambridge University Press, vol. 50(03), pages 379-406, June.
  11. Michael Grubb, 2003. "The Economics of the Kyoto Protocol," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(3), pages 143-189, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Book Review: The Case for a Carbon Tax, by Shi-Ling Hsu
    by James Handley in Carbon Tax Center on 2012-07-07 00:11:05
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Cited by:
  1. van Vuuren, Detlef P. & den Elzen, Michel G.J. & van Vliet, Jasper & Kram, Tom & Lucas, Paul & Isaac, Morna, 2009. "Comparison of different climate regimes: the impact of broadening participation," Energy Policy, Elsevier, vol. 37(12), pages 5351-5362, December.
  2. Mathews, John, 2007. "Seven steps to curb global warming," Energy Policy, Elsevier, vol. 35(8), pages 4247-4259, August.
  3. Moritz Rohling & Markus Ohndorf, 2010. "Prices vs. Quantities with Fiscal Cushioning," IED Working paper 10-11, IED Institute for Environmental Decisions, ETH Zurich.
  4. Weisbach, David, 2009. "Instrument Choice is Instrument Design," Working paper 4, Regulation2point0.

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