Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design

John C. V. Pezzey () and Frank Jotzo ()

No 95049, Research Reports from Australian National University, Environmental Economics Research Hub

Abstract: We give empirical welfare results for global greenhouse gas emission control, using the first multiparty model to combine tax-versus-trading under uncertainties with revenue recycling. Including multiple parties greatly reduces the welfare advantage of an emissions tax over emissions (permit) trading in handling abatement-cost uncertainties, from that shown by existing, single-party literature. But a tax has a different, much bigger advantage, from better handling uncertainties in business-as-usual emissions. Either mechanism's free emissions share, from tax thresholds or free permits, which lowers its possible welfare gain from revenue recycling, may however dominate any tax-versus-trading advantage. Moreover, political and practical constraints, such as the political unacceptability of no free emissions, the institutional unavailability of efficient emissions tax thresholds, and the unpopularity of recycling revenue as conventional tax cuts, make ideal welfare maximisation a poor guide for mechanism choice; and at optimal prices, trading currently tends to outperform taxation.

Keywords: climate policy; emission pricing; tax vs. trading; uncertainties; revenue recycling; political economy; Environmental Economics and Policy; D810; H230; Q580 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: 2010-09
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Working Paper: Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design (2010)
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