Prices and Quantities in a Climate Policy Setting
This paper takes its departure in two observations from the EU’s climate policy. First, the EU has adopted a dual approach with a trading scheme covering CO2 emissions from the energy intensive industry, while the remaining emitters are subject to emission taxes. Second, the targets are quantitatively phrased, i.e., there is an upper limit on the total CO2 emissions. These observations are of interest under the realistic assumption of abatement costs being uncertain. Then the dual approach is likely not ex post cost effective. Furthermore, earlier literature suggests that an emissions tax on CO2 yields lower expected efficiency losses than a tradable permit scheme. Thus, quantitative targets, which are easier fulfilled through a trading scheme, stand in contrast to taxes being the preferable policy instrument. The present paper addresses, by the means of a stylized model, the two observations and shows when and why a dual approach is optimal from an efficiency point of view given an upper limit on total emissions. What determines the characteristics of the optimal solution, e.g., size of the trading vs. taxed sector and tax levels, is studied in some detail.
|Date of creation:||25 Mar 2009|
|Date of revision:|
|Contact details of provider:|| Postal: VTI, Transport Economics, P.O. Box 6056, SE-171 06 Solna, Sweden|
Phone: +46-13-20 40 00
Fax: +46-13-14 14 36
Web page: http://www.vti.se/tek
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:hhs:vtiwps:2009_004. 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: (Mats Berggren)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.