Scandinavian Working Papers in Economics
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CTS - Centre for Transport Studies Stockholm (KTH and VTI)
CTS - Centre for Transport Studies Stockholm (KTH and VTI) CTS - Centre for Transport Studies Stockholm (KTH and VTI)
Working papers in Transport Economics

No 2013:33:
Indexing European carbon taxes to the EU ETS Permit Price: a good idea?

Björn Carlén () 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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