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Competitive Dominance of Emission Trading Over Pigouvian Taxation in a Globalized Economy

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Abstract

It is well-known that the Pigouvian taxation scheme and emission trading scheme (delegating the emission pricing authority to the market mechanism) offer equivalent incentives to reduce emissions in various autarky settings. In contrast, we demonstrate that in a globalized economy with international trade and cross border pollution, adopting the latter is the strict dominant strategy of each country, and global welfare is maximized when all countries adopt the latter. Adopting the latter incentivizes the other country to tighten its environmental regulation without concern for excessive shrink of domestic production and aggravation of cross border pollution from the adopting country. JEL Classification: H23, L51, Q56, Q58

Suggested Citation

  • Seung-Gyu Sim & Hsuan-Chih Lin, 2016. "Competitive Dominance of Emission Trading Over Pigouvian Taxation in a Globalized Economy," IEAS Working Paper : academic research 16-A004, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:16-a004
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    References listed on IDEAS

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    1. repec:wsi:ccexxx:v:04:y:2013:i:03:n:s2010007813500103 is not listed on IDEAS
    2. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    3. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-322, June.
    4. Brian C. Murray & Richard G. Newell & William A. Pizer, 2009. "Balancing Cost and Emissions Certainty: An Allowance Reserve for Cap-and-Trade," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 84-103, Winter.
    5. Lawrence H. Goulder & Andrew Schein, 2013. "Carbon Taxes vs. Cap and Trade: A Critical Review," NBER Working Papers 19338, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Emission Trading Scheme; Pigouvian Taxation; International Trade; Cross Border Pollution;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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