Tax versus emissions trading scheme in the long run

Takayoshi Shinkuma () and Hajime Sugeta ()

Journal of Environmental Economics and Management, 2016, vol. 75, issue C, 12-24

Abstract: In this paper we compare the performance of emission taxes and tradable permits under free market entry when firms face idiosyncratic ex ante cost uncertainty. We show that under auctioned permits insufficient entry occurs, while under a linear emission tax scheme, depending on parameters, market entry can be either excessive or insufficient. Our long-run analysis thus contrasts with Spulber׳s (1985) equivalence result and also modifies Weitzman׳s result in favor of an ETS in that the superiority of a tax over an ETS is not guaranteed, even when the Weitzman condition favors a tax. We also show that an ETS is superior to a tax scheme when the entry cost is low and the magnitude of uncertainty/asymmetric information and the size of the output market are large.

Keywords: Emissions trading scheme; Tax scheme; Uncertainty; Asymmetric information; Long-run perspective (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:75:y:2016:i:c:p:12-24

DOI: 10.1016/j.jeem.2015.09.002

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