Taxes, Permits, and Climate Change

22 Pages Posted: 16 Aug 2010

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2010

Abstract

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.

Suggested Citation

Kaplow, Louis, Taxes, Permits, and Climate Change (August 2010). NBER Working Paper No. w16268. Available at SSRN: https://ssrn.com/abstract=1658295

Louis Kaplow (Contact Author)

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