Optimal regulation of carbon and co-pollutants with spatially differentiated damages

Christine L. Crago and John Stranlund ()

No 205594, 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California from Agricultural and Applied Economics Association

Abstract: In this paper we investigate the optimal taxation of CO2 and its co-pollutants. While CO2 is a uniformly mixed stock pollutant, important CO2 co-pollutants like SO2, PM2.5 and PM10 are flow pollutants with spatially differentiated damages. Recent proposals have called for CO2 control that accounts for its effects on emissions of its co-pollutants, which implies that optimal CO2 taxes would have a spatial component. However we demonstrate that setting a CO2 tax that varies from its marginal damage is justified only if co-pollutants are regulated inefficiently. We demonstrate that the optimal CO2 tax deviates from the CO2 marginal damage across sources depending on the source-specific co-pollutant marginal damage, the level of inefficiency in the co-pollutant regulation, and the abatement cost interaction of the two pollutants. An alternative to adjusting CO2 policy to account for the inefficient regulation of a co-pollutant is to address the inefficiency directly by modifying the regulation of the co-pollutant. Since this approach is more efficient in general, we quantify the expected reduction in social costs from this regulation relative to adjusting CO2 taxes. With a simulation of CO2 and SO2 control from the U.S. power sector, we find that setting efficient taxes for both CO2 and SO2 provides a welfare gain that is likely to be many orders of magnitude greater than the gain from adjusting CO2 taxes to account for the inefficient regulation of SO2.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea15:205594

DOI: 10.22004/ag.econ.205594

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