Prices vs. Quantities with fiscal cushioning

Moritz Rohling and Markus Ohndorf

Resource and Energy Economics, 2012, vol. 34, issue 2, 169-187

Abstract: Enforcement of international environmental quantity regulations (e.g. tradable pollution permits) is often expected to be stricter than that of price regulations (e.g. emission taxes). While both instruments provide opportunities for misrepresenting actual pollution, enforcement of international price-based instruments is additionally hampered by potential fiscal cushioning, i.e. an adjustment of domestic fiscal policies offsetting the tax incentive to reduce emission reductions. The present paper extends the formal debate on Prices vs. Quantities by including the risk of fiscal cushioning. We find the level of the marginal benefit curve and the variance of costs become key elements for instrument choice and can render quantity regulations strictly preferable. Remarkably, in the latter case, the slopes of the marginal curves do not affect optimal instrument choice. Numerical calculations, using data taken from the international climate policy context, support the potential dominance of quantity regulations found in our formal analysis.

Keywords: Instrument choice; Incomplete enforcement; Uncertainty; Environmental regulation (search for similar items in EconPapers)
JEL-codes: D8 K42 L5 Q58 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Prices vs. Quantities with Fiscal Cushioning (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:34:y:2012:i:2:p:169-187

DOI: 10.1016/j.reseneeco.2011.10.004

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