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Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions

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  • Carolyn Fischer
  • Alan K. Fox

Abstract

The allocation of tradable emissions permits has important efficiency as well as distributional effects when tax and trade distortions are taken into account. We compare different rules for allocating carbon allowances within sectors (lump-sum grandfathering, output-based allocation (OBA), auctioning) and among sectors (historical emissions or value-added shares). The output subsidies implicit in OBA mitigate tax interactions, unlike grandfathering. OBA with sectoral distributions based on value added is similar to revenue recycling with auctioning. OBA based on historical emissions supports heavier polluters, more effectively counteracting carbon leakage, but at higher welfare costs. Less energy-intensive sectors are also sensitive to allocation rules.

Suggested Citation

  • Carolyn Fischer & Alan K. Fox, 2007. "Output-Based Allocation of Emissions Permits for Mitigating Tax and Trade Interactions," Land Economics, University of Wisconsin Press, vol. 83(4), pages 575-599.
    • Handle: RePEc:uwp:landec:v:83:y:2007:i:4:p:575-599
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    References listed on IDEAS

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    1. 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.
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    More about this item

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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