Indexing European carbon taxes to the EU ETS Permit Price: a good idea?

Björn Carlén () and Aday Hernández ()
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Björn Carlén: VTI, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden
Aday Hernández: University of Las Palmas de Gran Canaria, Postal: Department of Applied Economics, University of Las Palmas de Gran Canaria, Las Palmas, de Gran Canaria, Spain

No 2013:33, Working papers in Transport Economics from CTS - Centre for Transport Studies Stockholm (KTH and VTI)

Abstract: We study an environmental policy that (i) tax some emitters while others are covered by a cap-and-trade system and (ii) index the tax level to the permit price. Such a policy could be attractive in a world where abatement costs are uncertain and the regulator has information about the correlation between the cost shocks to the two groups. We show that this index policy yields lower expected social cost than the policy mix studied in Mandell (2008). The value of indexing is higher the stronger the correlation is, the steeper the marginal abatement benefit curve is, and the more uncertain we are about the taxed sector’s abatement costs. The index policy may also outperform the uniform policy alternatives emission tax and cap-and-trade system. The conditions for this are more restrictive, though. Given parameter values plausible for the European climate change policy context, expected net-gains are small or negative.

Keywords: Uncertainty; Environmental policy; Emissions tax; Tradable permits (search for similar items in EconPapers)
JEL-codes: H23 Q23 Q58 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2013-10-31
New Economics Papers: this item is included in nep-ene, nep-env, nep-eur, nep-pub, nep-reg and nep-res
Note: Previously presented at PET-13, the Association for Public Economic Theory annual conference, July 5-7, 2013, Lisbon, Portugal. And the Kuhmo NECTAR 2013 Annual Conference of the International Transportation Economics Association, Northwestern University, Evanston, Ill., USA, July 10-12, 2013. And the IAEE European 2013 meetings, International Association for Energy Economics, Düsseldorf, Germany, August 18-21, 2013.
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Citations: View citations in EconPapers (2)

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