A Sensible Policy Approach for Greenhouse Gas Regulation

Abstract

The two regulatory approaches traditionally employed for greenhouse gas control - caps and taxes - tend to be ineffectual or politically unviable because they either lack cost certainty or impose unacceptably high costs. Both obstacles are overcome by the regulatory model represented by the Swedish nitrogen oxide program, which provides price stability and cost certainty (as does a conventional tax), but which is revenue-neutral within the regulated industry (as is cap and trade with free allowance allocation). Such a regulatory approach, applied to greenhouse gas control, would provide both long-term incentives and a stable investment climate that could help facilitate a rapid and orderly transition to a low-carbon economy.

Keywords: Cap and trade, Environmental tax, Feebate

JEL Classification: H21, K32, O38