The Relative Efficiency of Market-based Environmental Policy Instruments with Imperfect Compliance

Sandra Rousseau and Stef Proost

Energy, Transport and Environment Working Papers Series from KU Leuven, Department of Economics - Research Group Energy, Transport and Environment

Abstract: This paper examines to what extent incomplete compliance of environmental regulation mitigates the distortions caused by pre-existing labour taxes. We study the relative cost efficiency of three market-based instruments: emission taxes, tradable permits and output taxes. In a first-best setting and given that monitoring and enforcement is costless, we find that the same utility levels can be reached with and without incomplete compliance. However, allowing for violations makes the policy instruments less effective. The nominal tax rate needs to be higher or the number of permits issued smaller, in order to obtain the required emission reduction. Including monitoring and enforcement aspects, and more specifically fines, into the model in a second-best setting, provides us with a new means of collecting tax revenues and of lessening existing tax distortions. We show that the relative position of grandfathered tradable permits vis-à-vis emission taxes improves considerably when allowing for incomplete compliance in a second-best setting

Keywords: Environmental policy; instrument choice; monitoring and enforcement (search for similar items in EconPapers)
Pages: 44 pages
Date: 2004
New Economics Papers: this item is included in nep-env
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The relative efficiency of market-based environmental policy instruments with imperfect compliance (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:ete:etewps:ete0415

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