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Alternate solutions in mixing energy tax/subsidy and emission control policies

Shahriar Shahr Heydari () and Niels Vestergaard ()
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Shahriar Shahr Heydari: Department of Environmental and Business Economics, University of Southern Denmark

No 119/15, Working Papers from University of Southern Denmark, Department of Sociology, Environmental and Business Economics

Abstract: In this article, we look at the combination of several market-based climate and energy policies and compare them with first best solution, i.e., a perfectly designed emission tax or emission cap level. It is shown that in the case an emission control policy is imperfect designed or implemented, its per-formance can be improved by an energy (output) tax/subsidy scheme, where the subsidy is given only to renewable generators or for energy efficiency improvements. This combination can bring the production levels and energy price to the optimum level. The emission level is also decreased by this combination, but not to the optimum level. Thus it may be considered as a second-best policy set. However, other targets on renewables share or energy efficiency level are improved instead, although they are bounded by an optimum level. The policy combination needs to be applied glob-ally to have its best effect and heterogeneous implementation (i.e. different levels of tax/subsidy for various regions) makes welfare loss, but still adding a global emission control policy to a set of ex-isting different local output tax/subsidy policies may be beneficial.

Keywords: Climate change mitigation; environmental policy; instrument mixes; economic ef-ficiency; environmental taxes and subsidies (search for similar items in EconPapers)
JEL-codes: C61 D60 H21 H23 Q41 Q48 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-03
New Economics Papers: this item is included in nep-ene, nep-env and nep-reg
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