Taxes Versus Tradable Permits Considering Public Environmental Awareness

Xiaoyan Wang () and Weiwei Zhang
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Xiaoyan Wang: Nanjing University of Finance and Economics
Weiwei Zhang: Chongqing Technology and Business University

Economics of Disasters and Climate Change, 2022, vol. 6, issue 2, No 4, 293-315

Abstract: Abstract This paper examines the relative performance of taxes and tradable permits when public environmental awareness is taken into account in policy-making. Two sovereign regions linked by a transboundary pollutant are considered. We show when public environmental awareness in one region increases, domestic government tightens its policy setting. While for foreign government, its response is different in these two polices. Under taxes, foreign government relaxes tax rate to get a free ride; under tradable permits, it may also tighten permit supply to benefit more from the international tradable permit market. But anyway, total pollution emissions are reduced. Moreover, when public environmental awareness in one region is sufficiently large, tradable permits welfare dominates taxes. However, public environmental awareness is bounded in reality. So, we further narrow its range to match reality. It is shown for the case of global externalities, tradable permits policy is superior. While for the case of reciprocal externalities, taxes policy is superior when pollution spillover is relatively low. And with the rise of public environmental awareness, the advantage of taxes is further strengthened.

Keywords: Environmental policy; Taxes; Tradable permits; Public environmental awareness; Transboundary pollution (search for similar items in EconPapers)
JEL-codes: L51 Q53 Q54 Q58 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s41885-022-00108-8

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