Taxes versus quantities reassessed

Larry Karp and Christian Traeger

Journal of Environmental Economics and Management, 2024, vol. 125, issue C

Abstract: The ongoing debate concerning the ranking of taxes versus cap and trade for climate policy begins with Weitzman’s (1974) seminal slope-based criterion and concludes that taxes likely dominate quotas. We challenge this conclusion and the intuition behind it. Because technology shocks and pollution stocks are both persistent, a technology shock alters the intercepts of both the marginal damage and abatement cost curves. The ratio of these two intercept shifts is as important as the ratio of slopes in ranking policies. Technology innovations diffuse gradually, strengthening the importance of the ratio of intercept shifts. For plausible parameter combinations, quotas can dominate taxes.

Keywords: Policy instruments; Pollution; Climate change; Taxes; Quantities; Regulation; Uncertainty; Cap and trade; Technology (search for similar items in EconPapers)
JEL-codes: D80 H20 Q00 Q50 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Taxes Versus Quantities Reassessed (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:125:y:2024:i:c:s0095069624000251

DOI: 10.1016/j.jeem.2024.102951

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