Refunding Emission Payments: Output-Based versus Expenditure-Based Refunding

50 Pages Posted: 17 Jun 2020

See all articles by Cathrine Hagem

Cathrine Hagem

Center for International Climate and Environmental Research (CICERO); Statistics Norway

Michael Hoel

University of Oslo; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Thomas Sterner

Göteborg University - Department of Economics

Date Written: 2020

Abstract

We analyse two mechanism designs for refunding emission payments to polluting firms: output-based refunding (OBR) and expenditure-based refunding (EBR). In both instruments, emission fees are returned to the polluting industry, typically making the policy more politically acceptable than a standard tax. The crucial difference between OBR and EBR is that the fees are refunded in proportion to output in the former but in proportion to the firms' expenditure on abatement technology equipment in the latter. To achieve the same abatement target as a standard tax, the fee level in the OBR design is higher, whereas the fee level in the EBR design is lower. The use of OBR and EBR may lead to large differences in the distribution of output and costs across firms. Both designs imply a cost-ineffective provision of abatement, as firms put relatively too much effort into reducing emissions through abatement technology compared with reducing output. However, a standard tax may be politically infeasible and maintaining output may be seen as a political advantage by policymakers if they seek to avoid activity reduction in the regulated sector.

Keywords: emission payments, carbon tax, refunding, CO2, NOX, policy design

JEL Classification: Q280, Q250, H230

Suggested Citation

Hagem, Cathrine and Hoel, Michael and Sterner, Thomas, Refunding Emission Payments: Output-Based versus Expenditure-Based Refunding (2020). CESifo Working Paper No. 8364, Available at SSRN: https://ssrn.com/abstract=3628952 or http://dx.doi.org/10.2139/ssrn.3628952

Cathrine Hagem (Contact Author)

Center for International Climate and Environmental Research (CICERO) ( email )

P.O. Box 1129 Blindern
Oslo, N-0317
Norway

Statistics Norway ( email )

N-0033 Oslo
Norway

Michael Hoel

University of Oslo ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway
+ 47 22 85 83 87 (Phone)
+ 47 22 85 50 35 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Thomas Sterner

Göteborg University - Department of Economics ( email )

Göteborg
Sweden

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