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Prices vs. Quantities with fiscal cushioning

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  • Rohling, Moritz
  • Ohndorf, Markus

Abstract

Enforcement of international environmental quantity regulations (e.g. tradable pollution permits) is often expected to be stricter than that of price regulations (e.g. emission taxes). While both instruments provide opportunities for misrepresenting actual pollution, enforcement of international price-based instruments is additionally hampered by potential fiscal cushioning, i.e. an adjustment of domestic fiscal policies offsetting the tax incentive to reduce emission reductions. The present paper extends the formal debate on Prices vs. Quantities by including the risk of fiscal cushioning. We find the level of the marginal benefit curve and the variance of costs become key elements for instrument choice and can render quantity regulations strictly preferable. Remarkably, in the latter case, the slopes of the marginal curves do not affect optimal instrument choice. Numerical calculations, using data taken from the international climate policy context, support the potential dominance of quantity regulations found in our formal analysis.

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  • Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
  • Handle: RePEc:eee:resene:v:34:y:2012:i:2:p:169-187
    DOI: 10.1016/j.reseneeco.2011.10.004
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    Cited by:

    1. Elisabetta Cornago & Renaud Foucart, 2014. "Instrument Choice and Cost Uncertainty in the Electricity Market," Working Papers ECARES ECARES 2014-13, ULB -- Universite Libre de Bruxelles.
    2. Markus Ohndorf, 2010. "Optimal Monitoring for project-based Emissions Trading Systems under incomplete Enforcement," IED Working paper 10-13, IED Institute for Environmental Decisions, ETH Zurich.
    3. Salvatore Di Falco & Marcella Veronesi, 2014. "Managing Environmental Risk in Presence of Climate Change: The Role of Adaptation in the Nile Basin of Ethiopia," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 553-577, April.
    4. Julia Blasch & Mehdi Farsi, 2012. "Retail demand for voluntary carbon offsets - A choice experiment among Swiss consumers," IED Working paper 12-18, IED Institute for Environmental Decisions, ETH Zurich.
    5. Ines Kapphan & Pierluigi Calanca & Annelie Holzkaemper, 2011. "Climate Change, Weather Insurance Design and Hedging Effectiveness," IED Working paper 11-17, IED Institute for Environmental Decisions, ETH Zurich.
    6. Thomas Epper & Helga Fehr-Duda & Renate Schubert, 2011. "Energy-Using Durables: The Role of Time Discounting in Investment Decisions," IED Working paper 11-16, IED Institute for Environmental Decisions, ETH Zurich.
    7. Pauli Lappi, 2016. "The welfare ranking of prices and quantities under noncompliance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 269-288, April.
    8. Thomas Bernauer & Lena Maria Schaffer, 2010. "Climate Change Governance," IED Working paper 10-12, IED Institute for Environmental Decisions, ETH Zurich.
    9. Oberauner, Iris Maria, 2010. "Prices vs. Quantities: An Empirical Study of Firms' Instrument Choice," Working papers 2010/07, Faculty of Business and Economics - University of Basel.
    10. Justin Caron & Markus Ohndorf, 2010. "Irreversibility and Optimal Timing of Climate Policy," IED Working paper 10-14, IED Institute for Environmental Decisions, ETH Zurich.
    11. Salvatore Di Falco & Marcella Veronesi, 2011. "On Adaptation to Climate Change and Risk Exposure in the Nile Basin of Ethiopia," IED Working paper 11-15, IED Institute for Environmental Decisions, ETH Zurich.
    12. Michele Baggio, 2012. "The Optimal Management of a Natural Resource with Switching Dynamics," IED Working paper 12-19, IED Institute for Environmental Decisions, ETH Zurich.
    13. Ian A. MacKenzie, 2015. "Prices versus quantities with distributional rent seeking," Discussion Papers Series 548, School of Economics, University of Queensland, Australia.
    14. Salvatore Di Falco & Marcella Veronesi, 2011. "On Adaptation to Climate Change and Risk Exposure in the Nile Basin of Ethiopia," IED Working paper 11-15, IED Institute for Environmental Decisions, ETH Zurich.
    15. repec:kap:pubcho:v:171:y:2017:i:1:d:10.1007_s11127-017-0401-8 is not listed on IDEAS

    More about this item

    Keywords

    Instrument choice; Incomplete enforcement; Uncertainty; Environmental regulation;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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