Cap-and-Trade or Carbon Taxes? The Feasibility of Enforcement and the Effects of Non-Compliance

Jon Hovi () and Bjart Holtsmark

Discussion Papers from Statistics Norway, Research Department

Abstract: One of the proposed alternatives to Kyoto's cap-and-trade approach is a regime based on an internationally harmonized carbon tax. In this paper, we consider and compare the enforcement problems associated with a tax regime and a cap-and-trade regime, respectively. The paper tries to convey two main points. First, both types of regime require an effective enforcement mechanism. However, such a mechanism is unlikely to be adopted as part of a regime with full participation, because the political process leading up to its adoption tends to water down the enforcement mechanism to a point where it no longer has much bite. And even if this is somehow avoided, countries expecting compliance to be difficult or costly will almost certainly decline to sign - not to mention ratify - the resulting agreement. Second, the implications of non-compliance in a tax regime differ in important ways from the corresponding implications in a cap-and-trade regime. In a cap-and-trade regime emissions trading can make inaction legitimate for buyers of emission permits. In particular, overselling of permits by one (or a few) permit exporting countries might completely undermine the regime's environmental effect. In a tax regime, by contrast, one country's non-compliance can not make inaction by other countries legitimate. It follows that an agreement based on a harmonized carbon tax will always have some effect, provided that at least one country complies.

Keywords: Climate agreements; compliance; enforcement; emissions trading; carbon taxes. (search for similar items in EconPapers)
JEL-codes: Q30 Q41 (search for similar items in EconPapers)
Date: 2005-10
New Economics Papers: this item is included in nep-ene and nep-env
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Journal Article: Cap-and-trade or carbon taxes? The feasibility of enforcement and the effects of non-compliance (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:436

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