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Efficient CO2 Emissions Control with National Emissions Taxes and International Emissions Trading

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  • Thomas Eichner
  • Rüdiger Pethig

Abstract

In a group of countries like the European Union all countries seek to achieve their national CO2 emissions target by a joint emissions trading scheme covering some part of their economies (trading sector) and by a national emissions tax in the rest of their economies (nontrading sector). Applicable are also emissions taxes overlapping with the trading scheme that can either be freely chosen or are inert. Welfare-maximizing governments determine tax rates and the tradable-permits budget. It is shown that efficiency requires not to levy overlapping emissions taxes and to set the tax rate in the nontrading sector equal to the permit price. In the small-country case emissions control turns out to be efficient if tax rates in the trading sector are flexible. Otherwise it is second-best to violate cost effectiveness and to choose an excessive endowment of tradable permits. If countries are large and optimal tariffs cannot be applied, emissions taxes or subsidies (!) are shown to serve as a perfect surrogate; efficiency cannot be attained unless there is a central authority mandating cost effectiveness and banning overlapping taxes. Fiscal externalities are specified and the countries’ welfare in the large and small country case is compared.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-04/cesifo1_wp1967.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1967.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_1967

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Related research

Keywords: emissions taxes; emissions trading; international trade;

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References

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  1. Christoph Bohringer & Tim Hoffmann & Andreas Lange & Andreas Loschel & Ulf Moslener, 2005. "Assessing Emission Regulation in Europe: An Interactive Simulation Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-22.
  2. Gernot Klepper & Sonja Peterson, 2004. "The EU Emissions Trading Scheme. Allowance Prices, Trade Flows, Competitiveness Effects," Working Papers 2004.49, Fondazione Eni Enrico Mattei.
  3. Steven Sorrell, 2003. "Carbon Trading in the Policy Mix," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 420-437.
  4. Markusen, James R, 1975. "Cooperative Control of International Pollution and Common Property Resources," The Quarterly Journal of Economics, MIT Press, vol. 89(4), pages 618-32, November.
  5. Böhringer, Christoph & Koschel, Henrike & Moslener, Ulf, 2006. "Efficiency Losses from Overlapping Economic Instruments in European Carbon Emissions Regulation," ZEW Discussion Papers 06-18, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Klepper, Gernot & Peterson, Sonja, 2004. "The EU emissions trading scheme allowance prices, trade flows and competitiveness effects," Open Access Publications from Kiel Institute for the World Economy 3270, Kiel Institute for the World Economy (IfW).
  7. Löschel, Andreas & Lange, Andreas & Hoffmann, Tim & Böhringer, Christoph & Moslener, Ulf, 2004. "Assessing Emission Allocation in Europe: An Interactive Simulation Approach," ZEW Discussion Papers 04-40, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. Rauscher, Michael, 1994. "On Ecological Dumping," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 822-40, Supplemen.
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Cited by:
  1. Ouattara, Bazoumana & Amegashie, J. Atsu & Strobl, Eric, 2009. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 24, Verein für Socialpolitik, Research Committee Development Economics.
  2. Thomas Eichner & Rüdiger Pethig, 2009. "Taxing and trading carbon emissions in the EU: Distributional comparisons of mixed policies," Volkswirtschaftliche Diskussionsbeiträge 135-09, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.

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