60 Pages Posted: 7 Sep 2012
Date Written: 2011
The goal of this article is to provide an analytical framework that policymakers can use when approaching questions regarding the taxation of a greenhouse gas emissions permit market that encompasses multiple periods and multiple jurisdictions. Under this framework for tax policy one must initially assess the extent to which certain aspects of climate policy are exogenously fixed. If tax policy is set prior to the establishment of an emissions cap, then the problem should be analyzed as one of optimal provision of public goods and the relevant efficiency condition is that marginal benefits of abatement should equal marginal costs of abatement. Under the more likely situation where tax policy must deal with an exogenously set cap, the relevant efficiency condition is that marginal abatement costs be equalized across firms. To assist the analysis of tax effects on this efficiency condition, the article introduces two relevant concepts: “intra-firm neutrality” and “inter-firm neutrality.” Intra-firm neutrality means that a given firm will face like tax treatment of all of the various options it faces (such as whether to use permits or to abate on the margin). This type of neutrality, however, does not require different firms to face the same tax rate. Inter-firm neutrality means that different firms in the market will face like tax treatment of each particular option the firms face. The article defends the basic normative proposition that inter-firm neutrality should be pursued within the context of a single country market, while intra-firm neutrality should be pursued within the context of a multi-country market. The article concludes with a case study applying the analytical framework developed here to the concrete question regarding the appropriate tax treatment of permits allocated gratis.
Suggested Citation: Suggested Citation
Kane, Mitchell, Taxation and Multi-Period Global Cap and Trade (2011). NYU Environmental Law Journal, Vol. 19, p. 87, 2011; NYU Law and Economics Research Paper No. 12-27. Available at SSRN: https://ssrn.com/abstract=2143239