Rebating Environmental Policy Revenues: Output-Based Allocations and Tradable Performance Standards

Carolyn Fischer

Discussion Papers from Resources For the Future

Abstract: Political pressure often exists to earmark environmental tax revenues or permit rents to the industry affected by the regulation. This paper analyzes schemes that rebate revenues based on output shares: tradable performance standards, an emissions tax with market-share rebates, and tradable permits with output-based allocation. All three policies effectively combine a tax on emissions with a subsidy to output. The result is a shifting of emissions control efforts toward greater emissions rate reduction and less output contraction, with higher marginal costs of control and lower output prices compared to the social optimum, given any targeted level of abatement. These welfare costs depend on the degree of output substitutability and are likely to be much larger in the long run. While some political and market-failure justifications may exist, policy makers should carefully consider industry characteristics before engaging in output-based rebating.

Keywords: emission tax; permit allocation; earmarking; tradable performance standards (search for similar items in EconPapers)
JEL-codes: H21 H23 Q2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-env and nep-pbe
Date: 2001-07-01
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