Tax versus emissions trading scheme in the long run |
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| Institution: | 1. Sanford School of Public Policy and Nicholas Institute for Environmental Policy Solutions, Duke University, United States;2. Resources for the Future, United States;3. National Bureau of Economic Research, United States;4. Center for Global Development, United States;5. Department of Economics and Curriculum for the Environment and Ecology, University of North Carolina at Chapel Hill, United States;1. School of Economics, The University of Queensland, Brisbane 4072, Australia;2. Institute for Environmental Decisions, ETH Zürich 8092, Switzerland;1. Institute of Industrial Economics, Jinan University, China;2. Guangdong University of Finance & Economics, China;1. Department of Economics, University of Richmond, VA, USA;2. Department of Economics, Binghamton University, P.O. Box 6000, Binghamton, NY, 13902-6000, USA;1. University of Michigan, United States;2. University of Maryland, United States;3. Resources for the Future (RFF), United States |
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| Abstract: | In this paper we compare the performance of emission taxes and tradable permits under free market entry when firms face idiosyncratic ex ante cost uncertainty. We show that under auctioned permits insufficient entry occurs, while under a linear emission tax scheme, depending on parameters, market entry can be either excessive or insufficient. Our long-run analysis thus contrasts with Spulber׳s (1985) equivalence result and also modifies Weitzman׳s result in favor of an ETS in that the superiority of a tax over an ETS is not guaranteed, even when the Weitzman condition favors a tax. We also show that an ETS is superior to a tax scheme when the entry cost is low and the magnitude of uncertainty/asymmetric information and the size of the output market are large. |
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| Keywords: | Emissions trading scheme Tax scheme Uncertainty Asymmetric information Long-run perspective |
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