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Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition

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  • Fischer, Carolyn

    () (Resources for the Future)

Abstract

Environmental policies with output-based refunding of the revenues effectively combine a tax on emissions with a subsidy to output. Three similar forms exist: tradable performance standards, an emissions tax with rebates, and tradable permits with output-based allocation. Two arguments for including an output subsidy are imperfect competition, in which an environmental regulation alone could exacerbate output underprovision, and imperfect participation, in which imposing a regulation on a subset of polluters could cause output to shift to exempt firms. However, both these scenarios imply that output shares among program participants are likely to be significant. In this situation, output-allocated permits offer less of a subsidy than a fixed rebate, and they can lead to inefficient shifting of production among participants. Rebating the emission tax reduces the incentive to abate, nor will marginal abatement costs be equalized if costs differ. These results hold in a Cournot duopoly model whether emission rates are determined simultaneously or strategically in a two-stage model.

Suggested Citation

  • Fischer, Carolyn, 2003. "Output-Based Allocation of Environmental Policy Revenues and Imperfect Competition," Discussion Papers dp-02-60, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-02-60
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    References listed on IDEAS

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    Cited by:

    1. Bushnell, James & Chen, Yihsu, 2012. "Allocation and leakage in regional cap-and-trade markets for CO2," Resource and Energy Economics, Elsevier, vol. 34(4), pages 647-668.
    2. Leon Vinokur, 2009. "Environmental Policy under Ambiguity," Working Papers 638, Queen Mary University of London, School of Economics and Finance.
    3. Ian W.H. Parry, 2005. "Fiscal Interactions and the Costs of Controlling Pollution from Electricity," RAND Journal of Economics, The RAND Corporation, pages 849-869.
    4. Parry, Ian, 2004. "Fiscal Interactions and the Costs of Controlling Pollution from Electricity," Discussion Papers dp-04-27, Resources For the Future.
    5. Holland, Stephen P., 2012. "Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation," Journal of Environmental Economics and Management, Elsevier, vol. 63(3), pages 375-387.
    6. Bushnell, James & Chen, Yihsu, 2009. "Regulation, Allocation and Leakage in Cap-And-Trade Markets for CO2," Staff General Research Papers Archive 13131, Iowa State University, Department of Economics.
    7. Stephen P. Holland, 2009. "Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power," NBER Working Papers 15262, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    emission tax; permit allocation; earmarking; tradable performance standards;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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