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Prices Versus Quantities Versus Hybrids in the Presence of Co-pollutants

John K. Stranlund () and Insung Son ()
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John K. Stranlund: University of Massachusetts-Amherst
Insung Son: Korea Energy Economics Institute

Environmental & Resource Economics, 2019, vol. 73, issue 2, 353-384

Abstract: Abstract We investigate the optimal regulation of a pollutant given its abatement interaction with another pollutant under asymmetric information about firms’ abatement costs. We take a policy-relevant, second-best approach by assuming that the co-pollutant is regulated exogenously, but perhaps not efficiently. Our focus is on optimal policy choice in this setting, and we derive rules for determining whether a pollutant should be regulated with an emissions tax, an emissions market, or a market with price controls, given the regulation of its co-pollutant. We find that the policy choice for a pollutant is unaffected by its interaction with a co-pollutant that is controlled with a fixed number of tradable permits, because changes in emissions of the primary pollutant do not affect aggregate emissions of the co-pollutant. However, when a co-pollutant is controlled with a tax, the policy choice for the primary pollutant must account for its effect on expected co-pollutant damage through changes in the variance of co-pollutant emissions. Consequently, standard conclusions about the environmental policy choice problem must be modified in this case. Our results have important implications for designing policies for greenhouse gases under uncertainty.

Keywords: Emissions trading; Emissions taxes; Cap-and-trade; Uncertainty; Price controls; Hybrid policies; Prices versus quantities (search for similar items in EconPapers)
JEL-codes: L51 Q58 (search for similar items in EconPapers)
Date: 2019
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