NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taxes, Permits, and Climate Change

Louis Kaplow

NBER Working Paper No. 16268
Issued in August 2010
NBER Program(s):   EEE   PE

This essay revisits the question of instrument choice for the regulation of externalities in the context of climate change. The central point is that the Pigouvian prescription to equate marginal control costs with the expected marginal benefits of damage reduction should guide the design of both carbon taxes and permit schemes. Because expected marginal damage rises nonlinearly, a corresponding nonlinear tax – or an equivalent price implemented through a quantity-adjusted permit scheme – is second best. Also considered are political factors, distinctive features of regulating a stock pollutant, and ex ante distortions due to the anticipation of transition relief (such as by receiving more free permits for greater emissions). Finally, distributive concerns are examined, with emphasis on the conceptual and practical benefits of addressing distributive issues with the tax and transfer system rather through adjustments to regulatory schemes that usually render them less effective.

download in pdf format
   (158 K)

email paper

This paper is available as PDF (158 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16268

Published: Taxes, Permits, and Climate Change, in U.S. Energy Tax Policy (Metcalf, ed., Cambridge University Press, 2011), 168-192.

Users who downloaded this paper also downloaded these:
Bushnell w16305 The Economics of Carbon Offsets
Krishna w16147 Limiting Emissions and Trade: Some Basic Ideas
Fowlie w16307 Updating the Allocation of Greenhouse Gas Emissions Permits in a Federal Cap-and-Trade Program
Holland w16158 Spillovers from Climate Policy
Goulder and Pizer w11923 The Economics of Climate Change
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us