Working papers in Transport Economics
Indexing European carbon taxes to the EU ETS Permit Price: a good idea?
() and Aday Hernández
Abstract: We study an environmental policy that (i) tax some
emitters while others are covered by a cap-and-trade system and (ii) index
the tax level to the permit price. Such a policy could be attractive in a
world where abatement costs are uncertain and the regulator has information
about the correlation between the cost shocks to the two groups. We show
that this index policy yields lower expected social cost than the policy
mix studied in Mandell (2008). The value of indexing is higher the stronger
the correlation is, the steeper the marginal abatement benefit curve is,
and the more uncertain we are about the taxed sector’s abatement costs. The
index policy may also outperform the uniform policy alternatives emission
tax and cap-and-trade system. The conditions for this are more restrictive,
though. Given parameter values plausible for the European climate change
policy context, expected net-gains are small or negative.
Keywords: Uncertainty; Environmental policy; Emissions tax; Tradable permits; (follow links to similar papers)
JEL-Codes: H23; Q23; Q58; (follow links to similar papers)
28 pages, October 31, 2013
Previously presented at PET-13, the Association for Public Economic Theory annual conference, July 5-7, 2013, Lisbon, Portugal. And the Kuhmo NECTAR 2013 Annual Conference of the International Transportation Economics Association, Northwestern University, Evanston, Ill., USA, July 10-12, 2013. And the IAEE European 2013 meetings, International Association for Energy Economics, Düsseldorf, Germany, August 18-21, 2013.
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