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A Stock Targeting International Carbon-Tax Rule with Uncertainty and Diminishing Compliance

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Abstract

A rule for setting a tax on carbon emissions to limit their atmospheric stock to a predetermined level is developed for a world inhabited by uncoordinated, myopic, expected utility maximizing agents. In all locations, the mean of the marginal product of the carbon emitting input diminishes and the variance increases as climate deteriorates. The rule is illustrated for a world divided into poor countries and rich countries. The poor countries’ costs of non-compliance with the tax, in terms of per capita utility loss from diminished reputation, are negligible. The rich countries' costs of non-compliance and, consequently, inclination to pay the globally set tax can be substantial but not identical. The number of complying rich countries decreases with the tax level, but at a rate that is moderated by the range of the rich countries’ loss of per capita utility from abstinence.

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File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@smm/documents/web/uow135277.pdf
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Paper provided by School of Economics, University of Wollongong, NSW, Australia in its series Economics Working Papers with number wp12-09.

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Length: 14 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:uow:depec1:wp12-09

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Postal: School of Economics, University of Wollongong, Northfields Avenue, Wollongong NSW 2522 Australia
Phone: +612 4221-3659
Fax: +612 4221-3725
Web page: http://business.uow.edu.au/econ/index.html
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Keywords: Carbon Emissions; Climate Change; Uncertainty; Tax; Compliance;

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  1. Hoel, Michael & Karp, Larry, 2001. "Taxes versus Quotas for a Stock Pollutant," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt5fx9p7kf, Department of Agricultural & Resource Economics, UC Berkeley.
  2. Pizer, William & Newell, Richard, 1998. "Regulating Stock Externalities Under Uncertainty," Discussion Papers dp-99-10-rev, Resources For the Future.
  3. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  4. Amnon Levy, 2011. "Abstinence with Reputation Loss, Understating Expectations and Guiltand the Effectiveness of Emission Tax," Economics Working Papers wp11-12, School of Economics, University of Wollongong, NSW, Australia.
  5. Fischer, Carolyn & Newell, Richard, 2004. "Environmental and Technology Policies for Climate Mitigation," Discussion Papers dp-04-05, Resources For the Future.
  6. Pizer, William A., 2002. "Combining price and quantity controls to mitigate global climate change," Journal of Public Economics, Elsevier, vol. 85(3), pages 409-434, September.
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