IDEAS home Printed from https://ideas.repec.org/p/bny/wpaper/0027.html
   My bibliography  Save this paper

The Fiscal Incentive of GHG Cap and Trade: Permits May Be Too Cheap and Developed Countries May Abate Too Little

Author

Listed:
  • J�rgen Juel Andersen
  • Mads Greaker

Abstract

The theoretical justi�cation for a greenhouse gas (GHG) cap and trade system is that participants will trade emission permits until their marginal cost of abatement equals the equilibrium price of emission permits. However, for �scally constrained governments this logic does not apply, as they have a �scal incentive to let welfare concerns, rather than industrial cost effciency, guide their abatement policy. Then, global cost e� ciency will fail even if just a (small) subset of governments are �scally constrained. Finally, we argue that any institutional change which breaks the connection between a government�s abatement policy and its budget will increase welfare.

Suggested Citation

  • J�rgen Juel Andersen & Mads Greaker, 2014. "The Fiscal Incentive of GHG Cap and Trade: Permits May Be Too Cheap and Developed Countries May Abate Too Little," Working Papers No 9/2014, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    • Handle: RePEc:bny:wpaper:0027
    as

    Download full text from publisher

    File URL: https://www.bi.edu/globalassets/forskning/camp/working-papers/2014/working_camp_9-2014.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Pollution permits and compliance strategies," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 85-125, October.
    2. Barrett, Scott, 1998. "Political Economy of the Kyoto Protocol," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 14(4), pages 20-39, Winter.
    3. Robert W. Hahn, 1984. "Market Power and Transferable Property Rights," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 753-765.
    4. Cathrine Hagem & Hege Westskog, 2009. "Allocating Tradable Permits on the Basis of Market Price to Achieve Cost Effectiveness," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 42(2), pages 139-149, February.
    5. Frederick van der Ploeg, 2011. "Natural Resources: Curse or Blessing?," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 366-420, June.
    6. repec:cep:stieop:41 is not listed on IDEAS
    7. Robinson, James A. & Torvik, Ragnar & Verdier, Thierry, 2006. "Political foundations of the resource curse," Journal of Development Economics, Elsevier, vol. 79(2), pages 447-468, April.
    8. Anders Jensen, 2011. "State-Building in Resource-Rich Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 39(2), pages 171-193, June.
    9. Springer, Urs, 2003. "The market for tradable GHG permits under the Kyoto Protocol: a survey of model studies," Energy Economics, Elsevier, vol. 25(5), pages 527-551, September.
    10. Simeon Djankov & Jose Montalvo & Marta Reynal-Querol, 2008. "The curse of aid," Journal of Economic Growth, Springer, vol. 13(3), pages 169-194, September.
    11. Nicola Gennaioli & Hans-Joachim Voth, 2015. "State Capacity and Military Conflict," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1409-1448.
    12. Rubin, Jonathan D., 1996. "A Model of Intertemporal Emission Trading, Banking, and Borrowing," Journal of Environmental Economics and Management, Elsevier, vol. 31(3), pages 269-286, November.
    13. Dincecco, Mark & Katz, Gabriel, 2012. "State Capacity and Long-Run Performance," MPRA Paper 38299, University Library of Munich, Germany.
    14. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    15. Hagem, Cathrine & Westskog, Hege, 1998. "The Design of a Dynamic Tradeable Quota System under Market Imperfections," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 89-107, July.
    16. Timothy Besley & Torsten Persson, 2013. "Taxation and Development," STICERD - Economic Organisation and Public Policy Discussion Papers Series 041, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jørgen Juel Andersen & Mads Greaker, 2018. "Emission Trading with Fiscal Externalities: The Case for a Common Carbon Tax for the Non-ETS Emissions in the EU," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 71(3), pages 803-823, November.
    2. Godal, Odd & Klaassen, Ger, 2006. "Carbon trading across sources and periods constrained by the Marrakesh Accords," Journal of Environmental Economics and Management, Elsevier, vol. 51(3), pages 308-322, May.
    3. Godal, Odd & Klaassen, Ger, 2003. "Compliance and Imperfect Intertemporal Carbon Trading," Working Papers in Economics 09/03, University of Bergen, Department of Economics.
    4. Timothy Besley & Torsten Persson, 2011. "Pillars of Prosperity: The Political Economics of Development Clusters," Economics Books, Princeton University Press, edition 1, number 9624.
    5. André, Francisco J. & de Castro, Luis M., 2015. "Incentives for Price Manipulation in Emission Permit Markets with Stackelberg Competition," Climate Change and Sustainable Development 197636, Fondazione Eni Enrico Mattei (FEEM).
    6. Tania Masi & Antonio Savoia & Kunal Sen, 2020. "Is there a fiscal resource curse? Resource rents, fiscal capacity, and political institutions in developing economies," WIDER Working Paper Series wp2020-10, World Institute for Development Economic Research (UNU-WIDER).
    7. Vincent Bertrand, 2013. "Modeling of Emission Allowance Markets: A Literature Review," Working Papers 1304, Chaire Economie du climat.
    8. GERMAIN, Marc & VAN STEENBERGHE, Vincent, 2001. "Optimal policy tradable and bankable pollution permits: taking the market microstructure into account," LIDAM Discussion Papers CORE 2001035, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Claire Armstrong, 2008. "Using history dependence to design a dynamic tradeable quota system under market imperfections," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 39(4), pages 447-457, April.
    10. André, Francisco J. & de Castro, Luis Miguel, 2015. "Scarcity Rents and Incentives for Price Manipulation in Emissions Permit Markets with Stackelberg Competition," MPRA Paper 61770, University Library of Munich, Germany.
    11. Mark Dincecco & James Fenske & Massimiliano Gaetano Onorato, 2019. "Is Africa Different? Historical Conflict and State Development," Economic History of Developing Regions, Taylor & Francis Journals, vol. 34(2), pages 209-250, May.
    12. Matti Liski & Juan‐Pablo Montero, 2011. "Market Power in an Exhaustible Resource Market: The Case of Storable Pollution Permits," Economic Journal, Royal Economic Society, vol. 121(551), pages 116-144, March.
    13. Marc Germain & Vincent Van Steenberghe & Alphonse Magnus, 2004. "Optimal Policy with Tradable and Bankable Pollution Permits: Taking the Market Microstructure into Account," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(5), pages 737-757, December.
    14. Tuan-Hwee Sng & Chiaki Moriguchi, 2014. "Asia’s little divergence: state capacity in China and Japan before 1850," Journal of Economic Growth, Springer, vol. 19(4), pages 439-470, December.
    15. Cathrine Hagem & Hege Westskog, 2008. "Intertemporal Emission Trading with a Dominant Agent: How does a Restriction on Borrowing Affect Efficiency?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 40(2), pages 217-232, June.
    16. Rodriguez Acosta, Mauricio, 2016. "Essays in political economy and resource economic : A macroeconomic approach," Other publications TiSEM 1e39ef1b-43a2-4f95-892c-6, Tilburg University, School of Economics and Management.
    17. Manuel Oechslin & Mauricio Rodriguez, 2021. "Fiscal weakness, the (under-) provision of public services, and institutional reform," Conflict Management and Peace Science, Peace Science Society (International), vol. 38(1), pages 20-44, January.
    18. Edouard Mien & Michaël Goujon, 2022. "40 Years of Dutch Disease Literature: Lessons for Developing Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(3), pages 351-383, September.
    19. Carsten Hefeker & Sebastian G. Kessing, 2017. "Competition for natural resources and the hold-up problem," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 871-888, August.

    More about this item

    Keywords

    environmental policy; fiscal icentive; fiscal constraints; GHG cap and trade; welfare;
    All these keywords.

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bny:wpaper:0027. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Helene Olsen (email available below). General contact details of provider: https://edirc.repec.org/data/cambino.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.