IDEAS home Printed from https://ideas.repec.org/p/een/ccepwp/1302.html
   My bibliography  Save this paper

Linking Price and Quantity Pollution Controls under Uncertainty

Author

Listed:
  • Peter J. Wood
  • Peter Heindl
  • Frank Jotzo
  • Andreas Loeschel

Abstract

This paper examines the linking of price-based and quantity-based provision of a public good by two parties in the example of pollution control under a global quantity constraint, using a stochastic partial-equilibrium model. One country chooses a price-based instrument (tax) and trades with another that lets its emissions price adjust. The expected cost for the price-setting country and the combined expected cost is higher than if both countries choose a quantity-based instrument, and the country with the quantity instrument stands to benefit in terms of expected net costs. The effect increases when the relative size of the country with the pice-based constraint increases; and increases with respect to the degree of correlation in ex-ante uncertain abatement costs. While the quantity-setting country benefits from lower expected costs in most circumstances, the variance in cost can be much higher if its costs are correlated with the pricesetting country. The optimal ex-ante tax rate differs from that under quantity-quantity linking. These results have important implications for instrument choice for the regulation of greenhouse gases and other pollutants and for the design of international agreements when there are domestic preferences for price

Suggested Citation

  • Peter J. Wood & Peter Heindl & Frank Jotzo & Andreas Loeschel, 2013. "Linking Price and Quantity Pollution Controls under Uncertainty," CCEP Working Papers 1302, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:ccepwp:1302
    as

    Download full text from publisher

    File URL: http://ccep.anu.edu.au/data/2013/pdf/wpaper/CCEP1302.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    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. Kolstad, Charles D., 1996. "Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 1-18, July.
    3. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    4. 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.
    5. Buchanan, James M & Tullock, Gordon, 1975. "Polluters' Profits and Political Response: Direct Controls Versus Taxes," American Economic Review, American Economic Association, vol. 65(1), pages 139-147, March.
    6. Beccherle, Julien & Tirole, Jean, 2011. "Regional initiatives and the cost of delaying binding climate change agreements," Journal of Public Economics, Elsevier, vol. 95(11), pages 1339-1348.
    7. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
    8. Krysiak, Frank C., 2008. "Prices vs. quantities: The effects on technology choice," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1275-1287, June.
    9. Hoel, Michael & Karp, Larry, 2002. "Taxes versus quotas for a stock pollutant," Resource and Energy Economics, Elsevier, vol. 24(4), pages 367-384, November.
    10. 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.
    11. 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.
    12. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
    13. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208.
    14. Requate, Till, 2005. "Dynamic incentives by environmental policy instruments--a survey," Ecological Economics, Elsevier, vol. 54(2-3), pages 175-195, August.
    15. William D. Nordhaus, 2006. "After Kyoto: Alternative Mechanisms to Control Global Warming," American Economic Review, American Economic Association, vol. 96(2), pages 31-34, May.
    16. Philippe Quirion, 2004. "Prices versus Quantities in a Second-Best Setting," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 29(3), pages 337-360, November.
    17. Pezzey, John C.V. & Jotzo, Frank, 2012. "Tax-versus-trading and efficient revenue recycling as issues for greenhouse gas abatement," Journal of Environmental Economics and Management, Elsevier, vol. 64(2), pages 230-236.
    18. Thomas A. Barthold, 1994. "Issues in the Design of Environmental Excise Taxes," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 133-151, Winter.
    19. 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.
    20. 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.
    21. Charles Howe, 1994. "Taxesversus tradable discharge permits: A review in the light of the U.S. and European experience," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 4(2), pages 151-169, April.
    22. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
    23. Downing, Paul B. & White, Lawrence J., 1986. "Innovation in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 13(1), pages 18-29, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Simon Quemin & Christian de Perthuis, 2017. "Transitional restricted linkage between Emissions Trading Schemes," Working Papers 1701, Chaire Economie du climat.
    2. Bernard Caillaud & Gabrielle Demange, 2017. "Joint Design of Emission Tax and Trading Systems," Annals of Economics and Statistics, GENES, issue 127, pages 163-201.
    3. Peter Heindl & Peter J. Wood & Frank Jotzo, 2014. "Combining International Cap-and-Trade with National Carbon Taxes," CCEP Working Papers 1418, Centre for Climate Economics & Policy, Crawford School of Public Policy, The Australian National University.
    4. Bernard Caillaud & Gabrielle Demange, 2016. "Joint Design of Emission Tax and Trading Systems," Working Papers halshs-01112185, HAL.

    More about this item

    Keywords

    Instrument Choice; Linking; Climate Policy; Prices vs. Quantities;

    JEL classification:

    • 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
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:een:ccepwp:1302. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David Stern). General contact details of provider: http://edirc.repec.org/data/asanuau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.