Cap-and-Trade or Carbon Taxes? The Feasibility of Enforcement and the Effects of Non-Compliance
AbstractOne of the proposed alternatives to Kyoto’s cap-and-trade approach is a regime based on an internationally harmonized carbon tax. In this paper, we consider and compare the enforcement problems associated with a tax regime and a cap-and-trade regime, respectively. The paper tries to convey two main points. First, both types of regime require an effective enforcement mechanism. However, such a mechanism is unlikely to be adopted as part of a regime with full participation, because the political process leading up to its adoption tends to water down the enforcement mechanism to a point where it no longer has much bite. And even if this is somehow avoided, countries expecting compliance to be difficult or costly will almost certainly decline to sign – not to mention ratify – the resulting agreement. Second, the implications of non-compliance in a tax regime differ in important ways from the corresponding implications in a cap-and-trade regime. In a cap-and-trade regime emissions trading can make inaction legitimate for buyers of emission permits. In particular, overselling of permits by one (or a few) permit exporting countries might completely undermine the regime’s environmental effect. In a tax regime, by contrast, one country's non-compliance can not make inaction by other countries legitimate. It follows that an agreement based on a harmonized carbon tax will always have some effect, provided that at least one country complies.
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Bibliographic InfoPaper provided by Research Department of Statistics Norway in its series Discussion Papers with number 436.
Date of creation: Oct 2005
Date of revision:
Climate agreements; compliance; enforcement; emissions trading; carbon taxes.;
Other versions of this item:
- Jon Hovi & Bjart Holtsmark, 2006. "Cap-and-trade or carbon taxes? The feasibility of enforcement and the effects of non-compliance," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 6(2), pages 137-155, June.
- Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-ENE-2005-12-09 (Energy Economics)
- NEP-ENV-2005-12-09 (Environmental Economics)
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