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The race for polluting permits

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  • BRECHET, Thierry

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • PERALTA, Susana

Abstract

International markets for tradable emission permits (TEP) co-exist with national energy taxation. A firm trading emission permits in the international market also pays energy taxes in its host country, thus creating an interaction between the international TEP-market and national energy taxes. In this paper we model that interaction in a framework of a perfectly competitive international TEP-market, where heterogeneous firms trade their TEP endowments. National governments set energy taxes non-cooperatively so as to maximize fiscal revenue from energy and profit taxes. We identify the driving forces behind Nash equilibrium taxes. We show how they depend on the total amount of TEPs in the market, on firms TEP-endowment and on thenumber of participating countries. We also show how energy taxation varies with the introduction of the market on a previously unregulated world. Finally, we highlight the fact that the TEP-market does not achieve abatement cost efficiency, despite itsbeing perfectly competitive.

Suggested Citation

  • BRECHET, Thierry & PERALTA, Susana, 2007. "The race for polluting permits," CORE Discussion Papers 2007027, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2007027
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    References listed on IDEAS

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    1. Peralta, Susana & van Ypersele, Tanguy, 2005. "Factor endowments and welfare levels in an asymmetric tax competition game," Journal of Urban Economics, Elsevier, vol. 57(2), pages 258-274, March.
    2. Santore, Rudy & Robison, H. David & Klein, Yehuda, 2001. "Strategic state-level environmental policy with asymmetric pollution spillovers," Journal of Public Economics, Elsevier, vol. 80(2), pages 199-224, May.
    3. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
    4. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(2), pages 269-304, June.
    5. Laussel, Didier & Le Breton, Michel, 1998. "Existence of Nash equilibria in fiscal competition models," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 283-296, May.
    6. Helm, Carsten, 2003. "International emissions trading with endogenous allowance choices," Journal of Public Economics, Elsevier, vol. 87(12), pages 2737-2747, December.
    7. Kanbur, Ravi & Keen, Michael, 1993. "Jeux Sans Frontieres: Tax Competition and Tax Coordination When Countries Differ in Size," American Economic Review, American Economic Association, vol. 83(4), pages 877-892, September.
    8. DePeter James A. & Myers Gordon M., 1994. "Strategic Capital Tax Competition: A Pecuniary Externality and a Corrective Device," Journal of Urban Economics, Elsevier, vol. 36(1), pages 66-78, July.
    9. Goulder Lawrence H., 1995. "Effects of Carbon Taxes in an Economy with Prior Tax Distortions: An Intertemporal General Equilibrium Analysis," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 271-297, November.
    10. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
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    Cited by:

    1. Costantini, Valeria & D'Amato, Alessio & Martini, Chiara & Tommasino, Maria Cristina & Valentini, Edilio & Zoli, Mariangela, 2013. "Taxing international emissions trading," Energy Economics, Elsevier, vol. 40(C), pages 609-621.
    2. Eichner, Thomas & Pethig, Rüdiger, 2014. "International carbon emissions trading and strategic incentives to subsidize green energy," Resource and Energy Economics, Elsevier, vol. 36(2), pages 469-486.
    3. BRECHET, Thierry & PERALTA, Susana, 2012. "Markets for tradable emission permits with fiscal competition," CORE Discussion Papers 2012054, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item

    Keywords

    tradable permits; fiscal competition; Kyoto protocol;

    JEL classification:

    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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