Uncertainty about compliance costs causes otherwise equivalent price and quantity controls to behave differently. Price controls — in the form of taxes — fix the marginal cost of compliance and lead to uncertain levels of compliance. Meanwhile quantity controls — in the form of tradable permits or quotas — fix the level of compliance but result in uncertain marginal costs. This fundamental difference in the face of cost uncertainty leads to different welfare outcomes for the two policy instruments. Seminal work by Weitzman (1974) clarified this point and derived theoretical conditions under which one policy is preferred to the other. This paper applies this principal to the issue of worldwide greenhouse gas (GHG) control, using a global integrated climate economy model to simulate the consequences of uncertainty and to compare the efficiency of taxes and permits empirically. The results indicate that an optimal tax policy generates gains which are five times higher than the optimal permit policy — a $337 billion dollar gain versus $69 billion at the global level. This result follows from Weitzman’s original intuition that relatively flat marginal benefits/damages favor taxes, a feature that drops out of standard assumptions about the nature of climate damages. A hybrid policy, suggested by Roberts and Spence (1976), is also explored. Such a policy uses an initial distribution of tradeable permits to set a target emission level, but then allows additional permits to be purchased at a fixed "trigger" price. The optimal hybrid policy leads to welfare benefits only slightly higher than the optimal tax policy. Relative to the tax policy, however, the hybrid preserves the ability to flexibly distribute the rents associated with the right to emit. Perhaps more importantly for policy discussions, a sub-optimal hybrid policy, based on a stringent target and high trigger price (e.g., 1990 emissions and a $100/tC trigger), generates much better welfare outcomes than a straight permit system with the same target. Both of these features suggest that a hybrid policy is a more attractive alternative to either a straight tax or permit system.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Resources For the Future in its series Discussion Papers with number
dp-98-02.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Did you know? You can import bibliographic info in various formats into you bibliographic tool, or just into your word processor. See under "publisher info" on each abstract page.