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Taxes Versus Quantities Reassessed

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  • Larry S. Karp
  • Christian P. Traeger

Abstract

The ongoing debate concerning the ranking of taxes versus cap and trade for climate policy begins with Weitzman’s (1974) seminal slope-based criterion and concludes that taxes dominate quotas. We challenge this conclusion and the intuition behind it. Because technology shocks and pollution stocks are both persistent, a technology shock alters the intercepts of both the marginal damage and abatement cost curves. The ratio of these two intercept shifts is as important as the ratio of slopes in ranking policies. Technology innovations diffuse gradually, strengthening the importance of the ratio of intercept shifts. For plausible parameter combinations, quotas can dominate taxes.

Suggested Citation

  • Larry S. Karp & Christian P. Traeger, 2018. "Taxes Versus Quantities Reassessed," CESifo Working Paper Series 7331, CESifo.
    • Handle: RePEc:ces:ceswps:_7331
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    References listed on IDEAS

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    1. Lawrence H. Goulder & Andrew R. Schein, 2013. "Carbon Taxes Versus Cap And Trade: A Critical Review," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 4(03), pages 1-28.
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    4. Brock, William & Engström, Gustav & Xepapadeas, Anastasios, 2014. "Spatial climate-economic models in the design of optimal climate policies across locations," European Economic Review, Elsevier, vol. 69(C), pages 78-103.
    5. 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.
    6. Wood, Peter John & Jotzo, Frank, 2011. "Price floors for emissions trading," Energy Policy, Elsevier, vol. 39(3), pages 1746-1753, March.
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    8. Perino, Grischa & Requate, Till, 2012. "Does more stringent environmental regulation induce or reduce technology adoption? When the rate of technology adoption is inverted U-shaped," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 456-467.
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    Cited by:

    1. Stiglitz, Joseph E., 2019. "Addressing climate change through price and non-price interventions," European Economic Review, Elsevier, vol. 119(C), pages 594-612.
    2. Torben K. Mideksa, 2020. "Pricing Pollution," CESifo Working Paper Series 8269, CESifo.
    3. Li, Jianglong & Huang, Jiashun, 2020. "The expansion of China's solar energy: Challenges and policy options," Renewable and Sustainable Energy Reviews, Elsevier, vol. 132(C).

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    More about this item

    Keywords

    policy instruments; pollution; climate change; taxes; quantities; regulation; uncertainty; cap and trade; technology;
    All these keywords.

    JEL classification:

    • Q00 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - General
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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