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Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design

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  • Jack Pezzey

    () (Fenner School of Environment and Society at the Australian National University)

  • Frank Jotzo

    () (Resource Management in Asia-Pacific Program in the Crawford School of Public Policy at The Australian National University)

Abstract

We give empirical welfare results for global greenhouse gas emission control, using the first multiparty model to combine tax-versus-trading under uncertainties with revenue recycling. Including multiple parties greatly reduces the welfare advantage of an emissions tax over emissions (permit) trading in handling abatement-cost uncertainties, from that shown by existing, single-party literature. But a tax has a different, much bigger advantage, from better handling uncertainties in business-as-usual emissions. Either mechanism's free emissions share, from tax thresholds or free permits, which lowers its possible welfare gain from revenue recycling, may however dominate any tax-versus-trading advantage. Moreover, political and practical constraints, such as the political unacceptability of no free emissions, the institutional unavailability of efficient emissions tax thresholds, and the unpopularity of recycling revenue as conventional tax cuts, make ideal welfare maximisation a poor guide for mechanism choice; and at optimal prices, trading currently tends to outperform taxation.

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Bibliographic Info

Paper provided by Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University in its series Environmental Economics Research Hub Research Reports with number 1068.

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Date of creation: Sep 2010
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Handle: RePEc:een:eenhrr:1068

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  1. Frank Jotzo & John Pezzey, 2007. "Optimal intensity targets for greenhouse gas emissions trading under uncertainty," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 38(2), pages 259-284, October.
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Cited by:
  1. Jack Pezzey & Frank Jotzo, 2010. "Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design," Environmental Economics Research Hub Research Reports 1068, Environmental Economics Research Hub, Crawford School of Public Policy, The Australian National University.
  2. Parsons, Oliver, 2012. "Community Governance: An Alternative Approach to Regulation and Market Mechanisms for Management of Nitrogen Loss," 2012 Conference, August 31, 2012, Nelson, New Zealand 136053, New Zealand Agricultural and Resource Economics Society.

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