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Emissions Taxes and Abatement Regulation under Uncertainty

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  • Vidar Christiansen
  • Stephen Smith

Abstract

We consider environmental regulation in a context where firms invest in abatement technology under conditions of uncertainty about subsequent abatement cost, but can subsequently adjust output in the light of true marginal abatement cost. Where an emission tax is the only available instrument, policy faces a trade-off between the incentive to invest in abatement technology and efficiency in subsequent output decisions. More efficient outcomes can be achieved through combined use of tax and mandated use of a given abatement technology or through combining the tax with an abatement technology investment subsidy. We compare the properties of the two potential supplements to the emissions tax.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-02/cesifo1_wp4121.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4121.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4121

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Related research

Keywords: externalities; Pigouvian taxes; subsidies; regulation;

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  1. Zhao, Jinhua, 2003. "Irreversible Abatement Investment Under Cost Uncertainties: Tradable Emission Permits and Emissions Charges," Staff General Research Papers 10223, Iowa State University, Department of Economics.
  2. Chao, Hung-Po & Wilson, Robert, 1993. "Option Value of Emission Allowances," Journal of Regulatory Economics, Springer, vol. 5(3), pages 233-49, September.
  3. Baldursson, Fridrik M & von der Fehr, N.-H.M.Nils-Henrik M, 2004. "Price volatility and risk exposure: on market-based environmental policy instruments," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 682-704, July.
  4. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
  5. Rajah, Najma & Smith, Stephen, 1993. "Taxes, Tax Expenditures, and Environmental Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 9(4), pages 41-65, Winter.
  6. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  7. Philippe Quirion, 2005. "Does uncertainty justify intensity emission caps?," Post-Print halshs-00007162, HAL.
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