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Taxes, Permits, and Climate Change

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  • Louis Kaplow

Abstract

This essay revisits the question of instrument choice for the regulation of externalities in the context of climate change. The central point is that the Pigouvian prescription to equate marginal control costs with the expected marginal benefits of damage reduction should guide the design of both carbon taxes and permit schemes. Because expected marginal damage rises nonlinearly, a corresponding nonlinear tax – or an equivalent price implemented through a quantity-adjusted permit scheme – is second best. Also considered are political factors, distinctive features of regulating a stock pollutant, and ex ante distortions due to the anticipation of transition relief (such as by receiving more free permits for greater emissions). Finally, distributive concerns are examined, with emphasis on the conceptual and practical benefits of addressing distributive issues with the tax and transfer system rather through adjustments to regulatory schemes that usually render them less effective.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16268.

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Date of creation: Aug 2010
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Publication status: published as Taxes, Permits, and Climate Change, in U.S. Energy Tax Policy (Metcalf, ed., Cambridge University Press, 2011), 168-192.
Handle: RePEc:nbr:nberwo:16268

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  1. Louis Kaplow, 1989. "Government Relief for Risk Associated with Government Action," NBER Working Papers 3006, National Bureau of Economic Research, Inc.
  2. Adar, Zvi & Griffin, James M., 1976. "Uncertainty and the choice of pollution control instruments," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 178-188, October.
  3. Strand, Jon, 2010. "Taxes and caps as climate policy instruments with domestic and imported fuels," Policy Research Working Paper Series, The World Bank 5171, The World Bank.
  4. West, Sarah E. & Williams III, Roberton C., 2007. "Optimal taxation and cross-price effects on labor supply: Estimates of the optimal gas tax," Journal of Public Economics, Elsevier, Elsevier, vol. 91(3-4), pages 593-617, April.
  5. Fishelson, Gideon, 1976. "Emission control policies under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 3(3), pages 189-197, October.
  6. Stavins, Robert N., 1996. "Correlated Uncertainty and Policy Instrument Choice," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 218-232, March.
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Cited by:
  1. Stavins, Robert N., 2010. "The Problem of the Commons: Still Unsettled After 100 Years," Discussion Papers, Resources For the Future dp-10-46, Resources For the Future.

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