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Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition

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  • Fischer, Carolyn

    () (Resources for the Future)

Abstract

Environmental policies with output-based refunding of the revenues effectively combine a tax on emissions with a subsidy to output. Three similar forms exist: tradable performance standards, an emissions tax with rebates, and tradable permits with output-based allocation. Two arguments for including an output subsidy are imperfect competition, in which an environmental regulation alone could exacerbate output underprovision, and imperfect participation, in which imposing a regulation on a subset of polluters could cause output to shift to exempt firms. However, both these scenarios imply that output shares among program participants are likely to be significant. In this situation, output-allocated permits offer less of a subsidy than a fixed rebate, and they can lead to inefficient shifting of production among participants. Rebating the emission tax reduces the incentive to abate, nor will marginal abatement costs be equalized if costs differ. These results hold in a Cournot duopoly model whether emission rates are determined simultaneously or strategically in a two-stage model.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-02-60.

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Date of creation: 01 Jan 2003
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Handle: RePEc:rff:dpaper:dp-02-60

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Keywords: emission tax; permit allocation; earmarking; tradable performance standards;

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References

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  1. Fischer, Carolyn & Bernard, Alain & Vielle, Marc, 2001. "Is There a Rationale for Rebating Environmental Levies?," Discussion Papers dp-01-31-, Resources For the Future.
  2. Hahn, Robert W., 1982. "Market Power and Transferable Property Rights," Working Papers 402, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Lee, Sang-Ho, 1999. "Optimal Taxation for Polluting Oligopolists with Endogenous Market Structure," Journal of Regulatory Economics, Springer, vol. 15(3), pages 293-308, May.
  4. Carraro, Carlo & Soubeyran, Antoine, 1995. "Environmental Feedbacks and Optimal Taxation in Oligopoly," CEPR Discussion Papers 1156, C.E.P.R. Discussion Papers.
  5. Parry, Ian W. H., 1997. "Environmental taxes and quotas in the presence of distorting taxes in factor markets," Resource and Energy Economics, Elsevier, vol. 19(3), pages 203-220, August.
  6. Fischer, Carolyn, 2001. "Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards," Discussion Papers dp-01-22, Resources For the Future.
  7. Ross McKitrick, 1999. "A Cournot Mechanism for Pollution Control under Asymmetric Information," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 14(3), pages 353-363, October.
  8. Katsoulacos, Yannis & Xepapadeas, Anastasios, 1994. "Environmental Policy Under Oligopoly with Endogenous Market Structure," CEPR Discussion Papers 955, C.E.P.R. Discussion Papers.
  9. Jensen, Jesper & Rasmussen, Tobias N., 2000. "Allocation of CO2 Emissions Permits: A General Equilibrium Analysis of Policy Instruments," Journal of Environmental Economics and Management, Elsevier, vol. 40(2), pages 111-136, September.
  10. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  11. Till Requate, 1993. "Pollution control in a Cournot duopoly via taxes or permits," Journal of Economics, Springer, vol. 58(3), pages 255-291, October.
  12. Hagem, Cathrine & Westskog, Hege, 1998. "The Design of a Dynamic Tradeable Quota System under Market Imperfections," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 89-107, July.
  13. Emmanuel Petrakis & Anastasios Xepapadeas, . "To Commit or Not to Commit: Environmental Policy In Imperfectly Competitive Markets," Working Papers 0110, University of Crete, Department of Economics.
  14. R. Simpson, 1995. "Optimal pollution taxation in a Cournot duopoly," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 6(4), pages 359-369, December.
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Cited by:
  1. James B. Bushnell & Yihsu Chen, 2009. "Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2," NBER Working Papers 15495, National Bureau of Economic Research, Inc.
  2. Leon Vinokur, 2009. "Environmental Policy under Ambiguity," Working Papers 638, Queen Mary, University of London, School of Economics and Finance.
  3. Parry, Ian, 2004. "Fiscal Interactions and the Costs of Controlling Pollution from Electricity," Discussion Papers dp-04-27, Resources For the Future.
  4. Stephen P. Holland, 2009. "Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power," NBER Working Papers 15262, National Bureau of Economic Research, Inc.
  5. Jan-Tjeerd Boom & Bouwe Dijkstra, 2009. "Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(1), pages 107-136, September.

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