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Prices vs. Quantities in International Pollution Regulation

Author

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  • Jared C. Carbone

    (Department of Economics and Business, Colorado School of Mines)

Abstract
In simple models of pollution regulation, both emission taxes and systems of tradable emission permits are minimum-cost methods of achieving a target level of pollution reduction. In this paper, I identify a source of asymmetry between permits and taxes based on the expectation a nation holds for the effect of its policy on interntational prices and pollution levels. Taxes allow for flexibility in the quantity of pollution produced and permits do not. In the context of international pollution policy, this means that a country may reasonably anticipate no foreign emission response to domestic abatement changes when the world’s abatement programs are denominated in terms of permits because permits cap aggregate pollution levels. The same is not true in tax-based regimes. Thus, tax or permit-based plans with the same regulatory goals will result in different equilibrium emission reductions, a different cost-benefit balance, and a different regional distribution of welfare impacts. The analysis provides an analytical description of the incentives faced by countries in each of these regimes and a numerical characterization of equilibrium outcomes for greenhouse gas emissions in a calibrated, general equilibrium model.

Suggested Citation

  • Jared C. Carbone, 2021. "Prices vs. Quantities in International Pollution Regulation," Working Papers 2021-01, Colorado School of Mines, Division of Economics and Business.
    • Handle: RePEc:mns:wpaper:wp202101
    as

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    File URL: http://econbus-papers.mines.edu/working-papers/wp202101.pdf
    File Function: First version, 2021
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    References listed on IDEAS

    as
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    4. Felder Stefan & Rutherford Thomas F., 1993. "Unilateral CO2 Reductions and Carbon Leakage: The Consequences of International Trade in Oil and Basic Materials," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 162-176, September.
    5. James R. MARKUSEN, 2021. "International Externalities And Optimal Tax Structures," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 16, pages 341-355, World Scientific Publishing Co. Pte. Ltd..
    6. Tol, Richard S J, 2001. "Climate Coalitions in an Integrated Assessment Model," Computational Economics, Springer;Society for Computational Economics, vol. 18(2), pages 159-172, October.
    7. Nordhaus, William D & Yang, Zili, 1996. "A Regional Dynamic General-Equilibrium Model of Alternative Climate-Change Strategies," American Economic Review, American Economic Association, vol. 86(4), pages 741-765, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Harstad, Bård & Lancia, Francesco & Russo, Alessia, 2022. "Prices vs. quantities for self-enforcing agreements," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).

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    More about this item

    Keywords

    climate change; general equilibrium; tradable permits; carbon tax;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F18 - International Economics - - Trade - - - Trade and Environment
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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