Prices vs. Quantities in International Pollution Regulation

Jared Carbone ()
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Jared Carbone: Department of Economics and Business, Colorado School of Mines

No 2021-01, Working Papers from Colorado School of Mines, Division of Economics and Business

Abstract: In simple models of pollution regulation, both emission taxes and systems of tradable emission permits are minimum-cost methods of achieving a target level of pollution reduction. In this paper, I identify a source of asymmetry between permits and taxes based on the expectation a nation holds for the effect of its policy on interntational prices and pollution levels. Taxes allow for flexibility in the quantity of pollution produced and permits do not. In the context of international pollution policy, this means that a country may reasonably anticipate no foreign emission response to domestic abatement changes when the world’s abatement programs are denominated in terms of permits because permits cap aggregate pollution levels. The same is not true in tax-based regimes. Thus, tax or permit-based plans with the same regulatory goals will result in different equilibrium emission reductions, a different cost-benefit balance, and a different regional distribution of welfare impacts. The analysis provides an analytical description of the incentives faced by countries in each of these regimes and a numerical characterization of equilibrium outcomes for greenhouse gas emissions in a calibrated, general equilibrium model.

Keywords: climate change; general equilibrium; tradable permits; carbon tax (search for similar items in EconPapers)
JEL-codes: D58 F18 F42 Q52 Q54 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2021-09
New Economics Papers: this item is included in nep-ene, nep-env, nep-isf and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://econbus-papers.mines.edu/working-papers/wp202101.pdf First version, 2021 (application/pdf)

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