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The Welfare Effects of Carbon Policies: Grandfathered Quotas versus Differentiated Taxes

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Abstract

Recently, it has been demonstrated that pre-existing distortionary taxes can substantially increase the costs of market-based instruments which do not raise revenue, such as non-auctioned emissions quotas. Revenue-raising market-based policy tools, such as carbon taxes, encounter other problems: The redistribution of property rights implied by introduction of such instruments is politically controversial, and in practice, tax rates are often differentiated to reduce political resistance. In the latter case, marginal abatement costs are not equalized between polluters. When comparing a policy with differentiated carbon taxes to a policy of free-issued quotas, financed through distortionary taxes, it is thus not obvious which alternative yields the highest social welfare. In this paper, we use a numerical intertemporal general equilibrium model for the Norwegian economy to compare the welfare effects of a differentiated carbon tax regime, exemplified by the current Norwegian carbon tax structure; a system of grandfathered tradable emission permits; and a uniform carbon tax regime. Grandfathered tradable quotas yield substantially lower welfare than the other two alternatives. However, differentiated taxes produce almost as high welfare as uniform taxes.

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Bibliographic Info

Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 261.

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Date of creation: Oct 1999
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Handle: RePEc:ssb:dispap:261

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Keywords: Dynamic equilibrium analysis; Free issued quotas; Environmental tax reforms.;

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References

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  1. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September.
  2. Goulder, Lawrence H. & Parry, Ian W. H. & Williams III, Roberton C. & Burtraw, Dallas, 1999. "The cost-effectiveness of alternative instruments for environmental protection in a second-best setting," Journal of Public Economics, Elsevier, vol. 72(3), pages 329-360, June.
  3. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  4. Bovenberg, A Lans & van der Ploeg, Frederick, 1994. " Green Policies and Public Finance in a Small Open Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(3), pages 343-63.
  5. Tor Jakob Klette, 1994. "Estimating Price- Cost Margins and Scale Economies from a Panel of Microdata," Discussion Papers, Research Department of Statistics Norway 130, Research Department of Statistics Norway.
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  7. Paul Ekins & Stefan Speck, 1999. "Competitiveness and Exemptions From Environmental Taxes in Europe," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 13(4), pages 369-396, June.
  8. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, vol. 2(2), pages 157-183, August.
  9. Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc.
  10. Bovenberg, A.L. & Ploeg, F. van der, 1994. "Green policies in a small open economy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152986, Tilburg University.
  11. 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.
  12. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January.
  13. Taran Fæhn & Erling Holmøy, 1999. "Welfare Effects of Trade Liberalisation in Distorted Economies A Dynamic General Equilibrium Assessment for Norway," Discussion Papers, Research Department of Statistics Norway 251, Research Department of Statistics Norway.
  14. John Pezzey & Andrew Park, 1998. "Reflections on the Double Dividend Debate," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 539-555, April.
  15. Steigum, E.Jr., 1992. "Accounting for Long-Run Effects of Fiscal Policy by Means of Computable Overlapping Generations Models," Papers, Norwegian School of Economics and Business Administration- 05-92, Norwegian School of Economics and Business Administration-.
  16. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
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  18. Parry, Ian W. H. & Williams III, Roberton C., 1999. "A second-best evaluation of eight policy instruments to reduce carbon emissions," Resource and Energy Economics, Elsevier, vol. 21(3-4), pages 347-373, August.
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Cited by:
  1. Brita Bye & Snorre Kverndokk & Knut Rosendahl, 2002. "Mitigation costs, distributional effects, and ancillary benefits of carbon policies in the Nordic countries, the U.K., and Ireland," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 7(4), pages 339-366, December.
  2. Bruvoll, Annegrete & Larsen, Bodil Merethe, 2004. "Greenhouse gas emissions in Norway: do carbon taxes work?," Energy Policy, Elsevier, vol. 32(4), pages 493-505, March.
  3. Burtraw, Dallas & Cannon, Matthew, 2000. "Heterogeneity in Costs and Second-Best Policies for Environmental Protection," Discussion Papers, Resources For the Future dp-00-20, Resources For the Future.
  4. Kverndokk,S. & Rosendahl,E., 2000. "CO2 mitigation costs and ancillary benefits in the Nordic countries, the UK and Ireland : a survey," Memorandum 34/2000, Oslo University, Department of Economics.

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