Refunded Emission Taxes: A Coherent Post-Kyoto Policy Framework for Greenhouse Gas Regulation

Abstract

Current experience with the Kyoto Protocol indicates that climate sustainability goals will be attainable only if future regulatory policy is grounded on a sound and clearly articulated policy rationale that is relevant to political and economic realities. The mandatory targets and timetables approach employed by Kyoto has a clear and coherent rationale if environmental objectives take precedence over cost considerations and emissions are capped at a sustainable level; but in the context of real-world political constraints and priorities, mandatory emission caps can have the perverse effect of actually reducing the likelihood that climate sustainability will be achieved. An alternative policy instrument that would be better adapted to political and economic realities is a refunded emission tax, which would be revenue-neutral within specific regulated industry sectors and would create long-term market incentives for minimizing GHG emissions (rather than merely capping emissions at an unsustainable level) while limiting regulation-induced costs and eliminating market price volatility.

[Note: A summary version of this paper is published in Energy Policy 35 (5), 3115-3118; available online 30 November 2006. A less technical summary paper is also posted at http://ssrn.com/abstract=945570.]

Keywords: Cap and trade, Refunded emission payments, Feebate

JEL Classification: H21, K32, O38