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Cap-and-Trade or Carbon Taxes? The Feasibility of Enforcement and the Effects of Non-Compliance

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One of the proposed alternatives to Kyoto's cap-and-trade approach is a regime based on an internationally harmonized carbon tax. In this paper, we consider and compare the enforcement problems associated with a tax regime and a cap-and-trade regime, respectively. The paper tries to convey two main points. First, both types of regime require an effective enforcement mechanism. However, such a mechanism is unlikely to be adopted as part of a regime with full participation, because the political process leading up to its adoption tends to water down the enforcement mechanism to a point where it no longer has much bite. And even if this is somehow avoided, countries expecting compliance to be difficult or costly will almost certainly decline to sign - not to mention ratify - the resulting agreement. Second, the implications of non-compliance in a tax regime differ in important ways from the corresponding implications in a cap-and-trade regime. In a cap-and-trade regime emissions trading can make inaction legitimate for buyers of emission permits. In particular, overselling of permits by one (or a few) permit exporting countries might completely undermine the regime's environmental effect. In a tax regime, by contrast, one country's non-compliance can not make inaction by other countries legitimate. It follows that an agreement based on a harmonized carbon tax will always have some effect, provided that at least one country complies.

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  • Jon Hovi & Bjart Holtsmark, 2005. "Cap-and-Trade or Carbon Taxes? The Feasibility of Enforcement and the Effects of Non-Compliance," Discussion Papers 436, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:436
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Book Review: The Case for a Carbon Tax, by Shi-Ling Hsu
      by James Handley in Carbon Tax Center on 2012-07-07 05:11:05

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    Cited by:

    1. Agni Kalfagianni & Oran R. Young, 2022. "The politics of multilateral environmental agreements lessons from 20 years of INEA," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 22(2), pages 245-262, June.
    2. Rohling, Moritz & Ohndorf, Markus, 2012. "Prices vs. Quantities with fiscal cushioning," Resource and Energy Economics, Elsevier, vol. 34(2), pages 169-187.
    3. Bjart Holtsmark, 2013. "International cooperation on climate change: why is there so little progress?," Chapters, in: Roger Fouquet (ed.), Handbook on Energy and Climate Change, chapter 13, pages 327-343, Edward Elgar Publishing.
    4. Stine Aakre & Jon Hovi, 2010. "Emission trading: Participation enforcement determines the need for compliance enforcement," European Union Politics, , vol. 11(3), pages 427-445, September.
    5. Mathews, John, 2007. "Seven steps to curb global warming," Energy Policy, Elsevier, vol. 35(8), pages 4247-4259, August.
    6. van Vuuren, Detlef P. & den Elzen, Michel G.J. & van Vliet, Jasper & Kram, Tom & Lucas, Paul & Isaac, Morna, 2009. "Comparison of different climate regimes: the impact of broadening participation," Energy Policy, Elsevier, vol. 37(12), pages 5351-5362, December.
    7. Stine Aakre, 2016. "The political feasibility of potent enforcement in a post-Kyoto climate agreement," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 16(1), pages 145-159, February.
    8. Ping He & Guowei Dou & Wei Zhang, 2017. "Optimal production planning and cap setting under cap-and-trade regulation," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(9), pages 1094-1105, September.
    9. Font Vivanco, David & Kemp, René & van der Voet, Ester, 2016. "How to deal with the rebound effect? A policy-oriented approach," Energy Policy, Elsevier, vol. 94(C), pages 114-125.

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    More about this item

    Keywords

    Climate agreements; compliance; enforcement; emissions trading; carbon taxes.;
    All these keywords.

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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