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Prices vs. Quantities: An Empirical Study of Firms' Instrument Choice

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  • Oberauner, Iris Maria

Abstract

A longstanding theoretical discussion on the merits of prices vs. quantities for regulating emissions under uncertainty exists in environmental policy literature. However, empirical evidence w.r.t. instrument choice has not been put forward so far. In particular, very little is known about instrument preferences from the perspective of firms. Investigating Swiss climate policy provides an ideal field for encountering both of the above concerns. In Switzerland, firms can selfselect between a tax (with a wage-based tax exemption) and emissions trading (with a grandfathering mode of permit allocation) to regulate their CO2 emissions. In our paper, we empirically investigate this selfselection mechanism based on a cross section of Swiss firm-level data. Specific theory on Swiss policy design identifies the influential factors as being permit allocation, wages, uncertainty in abatement costs and the flexibility of firms’ abatement technologies. We confirm evidence for the first two factors, but were unable to find evidence for the latter ones. Moreover, high-abatement firms tend to choose permit trading.

Suggested Citation

  • 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.
  • Handle: RePEc:bsl:wpaper:2010/07
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    References listed on IDEAS

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    1. Krysiak, Frank C. & Oberauner, Iris Maria, 2010. "Environmental policy à la carte: Letting firms choose their regulation," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 221-232, November.
    2. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    3. Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
    4. Roberton Williams, 2002. "Prices vs. Quantities vs. Tradable Quantities," NBER Working Papers 9283, National Bureau of Economic Research, Inc.
    5. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
    6. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, April.
    7. 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.
    8. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    9. Newell, Richard G. & Pizer, William A., 2003. "Regulating stock externalities under uncertainty," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 416-432, March.
    10. Delmas Magali & Marcus Alfred, 2004. "Firms' Choice of Regulatory Instruments to Reduce Pollution: A Transaction Cost Approach," Business and Politics, De Gruyter, vol. 6(3), pages 1-22, December.
    11. Mandell, Svante, 2008. "Optimal mix of emissions taxes and cap-and-trade," Journal of Environmental Economics and Management, Elsevier, vol. 56(2), pages 131-140, September.
    12. Cameron Hepburn, 2006. "Regulation by Prices, Quantities, or Both: A Review of Instrument Choice," Oxford Review of Economic Policy, Oxford University Press, vol. 22(2), pages 226-247, Summer.
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    1. repec:spr:sjecst:v:154:y:2018:i:1:d:10.1186_s41937-017-0016-5 is not listed on IDEAS

    More about this item

    Keywords

    Prices vs. Quantities; Instrument Choice; Swiss Climate Policy; Environmental Policy à la Carte;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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