Taxes, Permits, and Climate Change

Louis Kaplow

No 16268, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This essay revisits the question of instrument choice for the regulation of externalities in the context of climate change. The central point is that the Pigouvian prescription to equate marginal control costs with the expected marginal benefits of damage reduction should guide the design of both carbon taxes and permit schemes. Because expected marginal damage rises nonlinearly, a corresponding nonlinear tax - or an equivalent price implemented through a quantity-adjusted permit scheme - is second best. Also considered are political factors, distinctive features of regulating a stock pollutant, and ex ante distortions due to the anticipation of transition relief (such as by receiving more free permits for greater emissions). Finally, distributive concerns are examined, with emphasis on the conceptual and practical benefits of addressing distributive issues with the tax and transfer system rather through adjustments to regulatory schemes that usually render them less effective.

JEL-codes: D61 D62 H21 H23 K32 Q52 Q54 Q58 (search for similar items in EconPapers)
Date: 2010-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
Note: EEE PE
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Citations: View citations in EconPapers (6)

Published as Taxes, Permits, and Climate Change, in U.S. Energy Tax Policy (Metcalf, ed., Cambridge University Press, 2011), 168-192.

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