Time-inconsistent environmental policies with a consumer-friendly firm: tradable permits versus emission tax

Arturo Garcia, Mariel Leal and Sang-Ho Lee

MPRA Paper from University Library of Munich, Germany

Abstract: This study considers the timing of environmental policies with a consumer-friendly firm having abatement technology, and compares two market-based regulations: tradable permits and emission tax regulations. When the government can credibly commit its policy, we show that the equilibrium outcomes under both policies are equivalent in terms of permits price and tax rate. Under the non-committed policy, however, the equivalence breaks down because firms have different incentives to induce time-consistent policy to be adjusted ex post. In particular, compared to pre-committed government, firms abate less emission to induce higher emission quotas under the permits policy while a consumer-friendly firm abates more emissions to reduce tax rate under the tax policy. Finally, we show that tax policy can induce higher welfare and lower environmental damage when the concern on consumer surplus is moderate.

Keywords: abatement technology; consumer-friendly firm; environmental policy; tradable permits; emission tax (search for similar items in EconPapers)
JEL-codes: L13 L31 Q58 (search for similar items in EconPapers)
Date: 2018-04-01
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Journal Article: Time-inconsistent environmental policies with a consumer-friendly firm: Tradable permits versus emission tax (2018)
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