Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading

The authors examine policy problems related to the use of emissions taxes, and emissions trading, two market-based instruments for controlling pollution by getting regulated firms to adopt cleaner technologies. By attaching an explicit price to emi...

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Main Authors: Kennedy, Peter W., Laplante, Benoit
Format: Policy Research Working Paper
Language:English
en_US
Published: World Bank, Washington, DC 2014
Subjects:
Online Access:http://documents.worldbank.org/curated/en/2000/05/437409/environmental-policy-time-consistency-emissions-taxes-emissions-trading
http://hdl.handle.net/10986/18852
id okr-10986-18852
recordtype oai_dc
spelling okr-10986-188522021-04-23T14:03:46Z Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading Kennedy, Peter W. Laplante, Benoit ABATEMENT COST ABATEMENT MEASURES AGGREGATE EMISSIONS AGGREGATE LEVEL AGGREGATE SUPPLY ALTERNATIVE TECHNOLOGIES CLEANER TECHNOLOGIES CLEANER TECHNOLOGY COMPARATIVE ANALYSIS DAMAGE FUNCTION EMISSION EMISSION STANDARDS EMISSION TAXES EMISSIONS EMISSIONS STANDARDS EMISSIONS TAXES ENVIRONMENTAL DAMAGE ENVIRONMENTAL POLICY ENVIRONMENTAL PROBLEMS EQUILIBRIUM EQUILIBRIUM PRICES FOREST MANAGEMENT INDUSTRIAL TECHNOLOGY LEVEL OF EMISSIONS MARGINAL ABATEMENT MARGINAL ABATEMENT COST MARGINAL ABATEMENT COSTS MARKET POWER NEW TECHNOLOGIES NEW TECHNOLOGY PERMIT PRICE PERMIT SUPPLY POLICY INSTRUMENTS POLLUTION POLLUTION CONTROL POLLUTION LEVELS POLLUTION REDUCTION PRODUCTION TECHNIQUES PRODUCTION TECHNOLOGY RATIONAL EXPECTATIONS REMEDIAL ACTION SHADOW PRICE TECHNOLOGICAL CHANGE TECHNOLOGICAL DEVELOPMENT TECHNOLOGY ADOPTION TECHNOLOGY CHOICE TRADABLE PERMITS The authors examine policy problems related to the use of emissions taxes, and emissions trading, two market-based instruments for controlling pollution by getting regulated firms to adopt cleaner technologies. By attaching an explicit price to emissions, these instruments give firms an incentive to continually reduce their volume of emissions. Command, and-control emissions standards create incentives to adopt cleaner technologies only up to the point where the standards are no longer binding (at which point the shadow price on emissions falls to zero). But the ongoing incentives created by the market-based instruments are not necessarily right, either. Time-consistency constraints on the setting of these instruments limit the regulator's ability to set policies that lead to efficiency in adopting technology options. After examining the time-consistency properties of a Pigouvian emissions tax, and of the emissions trading, the authors find that: 1) If damage is linear, efficiency in adopting technologies involves either universal adoption of the new technology, or universal retention of the old technology, depending on the cost of adoption. The first best tax policy, and the first-best permit-supply policy are both time-consistent under these conditions. 2) If damage is strictly convex, efficiency may require partial adoption of the new technology. In this case, the first-best tax policy is not time-consistent, and the tax rate must be adjusted after adoption has taken place (ratcheting). Ratcheting will induce an efficient equilibrium if there is a large number of firms. If there are relatively few firms, ratcheting creates too many incentives to adopt the new technology. 3) The first-best supply policy is time-consistent if there is a large number of firms. If there are relatively few firms, the first-best supply policy may not be time-consistent, and the regulator must ratchet the supply of permits. With this policy, there are not enough incentives for firms to adopt the new technology. The results do not strongly favor one policy instrument over the other, but if the point of an emissions trading program is to increase technological efficiency, it is necessary to continually adjust the supply of permits in response to technological change, even when the damage is linear. This continual adjustment is not needed for an emissions tax when damage is linear, which may give emissions taxes an advantage over emissions trading. 2014-06-30T19:17:43Z 2014-06-30T19:17:43Z 2000-05 http://documents.worldbank.org/curated/en/2000/05/437409/environmental-policy-time-consistency-emissions-taxes-emissions-trading http://hdl.handle.net/10986/18852 English en_US Policy Research Working Paper;No. 2351 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type Digital Repository
institution_category Foreign Institution
institution Digital Repositories
building World Bank Open Knowledge Repository
collection World Bank
language English
en_US
topic ABATEMENT COST
ABATEMENT MEASURES
AGGREGATE EMISSIONS
AGGREGATE LEVEL
AGGREGATE SUPPLY
ALTERNATIVE TECHNOLOGIES
CLEANER TECHNOLOGIES
CLEANER TECHNOLOGY
COMPARATIVE ANALYSIS
DAMAGE FUNCTION
EMISSION
EMISSION STANDARDS
EMISSION TAXES
EMISSIONS
EMISSIONS STANDARDS
EMISSIONS TAXES
ENVIRONMENTAL DAMAGE
ENVIRONMENTAL POLICY
ENVIRONMENTAL PROBLEMS
EQUILIBRIUM
EQUILIBRIUM PRICES
FOREST MANAGEMENT
INDUSTRIAL TECHNOLOGY
LEVEL OF EMISSIONS
MARGINAL ABATEMENT
MARGINAL ABATEMENT COST
MARGINAL ABATEMENT COSTS
MARKET POWER
NEW TECHNOLOGIES
NEW TECHNOLOGY
PERMIT PRICE
PERMIT SUPPLY
POLICY INSTRUMENTS
POLLUTION
POLLUTION CONTROL
POLLUTION LEVELS
POLLUTION REDUCTION
PRODUCTION TECHNIQUES
PRODUCTION TECHNOLOGY
RATIONAL EXPECTATIONS
REMEDIAL ACTION
SHADOW PRICE
TECHNOLOGICAL CHANGE
TECHNOLOGICAL DEVELOPMENT
TECHNOLOGY ADOPTION
TECHNOLOGY CHOICE
TRADABLE PERMITS
spellingShingle ABATEMENT COST
ABATEMENT MEASURES
AGGREGATE EMISSIONS
AGGREGATE LEVEL
AGGREGATE SUPPLY
ALTERNATIVE TECHNOLOGIES
CLEANER TECHNOLOGIES
CLEANER TECHNOLOGY
COMPARATIVE ANALYSIS
DAMAGE FUNCTION
EMISSION
EMISSION STANDARDS
EMISSION TAXES
EMISSIONS
EMISSIONS STANDARDS
EMISSIONS TAXES
ENVIRONMENTAL DAMAGE
ENVIRONMENTAL POLICY
ENVIRONMENTAL PROBLEMS
EQUILIBRIUM
EQUILIBRIUM PRICES
FOREST MANAGEMENT
INDUSTRIAL TECHNOLOGY
LEVEL OF EMISSIONS
MARGINAL ABATEMENT
MARGINAL ABATEMENT COST
MARGINAL ABATEMENT COSTS
MARKET POWER
NEW TECHNOLOGIES
NEW TECHNOLOGY
PERMIT PRICE
PERMIT SUPPLY
POLICY INSTRUMENTS
POLLUTION
POLLUTION CONTROL
POLLUTION LEVELS
POLLUTION REDUCTION
PRODUCTION TECHNIQUES
PRODUCTION TECHNOLOGY
RATIONAL EXPECTATIONS
REMEDIAL ACTION
SHADOW PRICE
TECHNOLOGICAL CHANGE
TECHNOLOGICAL DEVELOPMENT
TECHNOLOGY ADOPTION
TECHNOLOGY CHOICE
TRADABLE PERMITS
Kennedy, Peter W.
Laplante, Benoit
Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading
relation Policy Research Working Paper;No. 2351
description The authors examine policy problems related to the use of emissions taxes, and emissions trading, two market-based instruments for controlling pollution by getting regulated firms to adopt cleaner technologies. By attaching an explicit price to emissions, these instruments give firms an incentive to continually reduce their volume of emissions. Command, and-control emissions standards create incentives to adopt cleaner technologies only up to the point where the standards are no longer binding (at which point the shadow price on emissions falls to zero). But the ongoing incentives created by the market-based instruments are not necessarily right, either. Time-consistency constraints on the setting of these instruments limit the regulator's ability to set policies that lead to efficiency in adopting technology options. After examining the time-consistency properties of a Pigouvian emissions tax, and of the emissions trading, the authors find that: 1) If damage is linear, efficiency in adopting technologies involves either universal adoption of the new technology, or universal retention of the old technology, depending on the cost of adoption. The first best tax policy, and the first-best permit-supply policy are both time-consistent under these conditions. 2) If damage is strictly convex, efficiency may require partial adoption of the new technology. In this case, the first-best tax policy is not time-consistent, and the tax rate must be adjusted after adoption has taken place (ratcheting). Ratcheting will induce an efficient equilibrium if there is a large number of firms. If there are relatively few firms, ratcheting creates too many incentives to adopt the new technology. 3) The first-best supply policy is time-consistent if there is a large number of firms. If there are relatively few firms, the first-best supply policy may not be time-consistent, and the regulator must ratchet the supply of permits. With this policy, there are not enough incentives for firms to adopt the new technology. The results do not strongly favor one policy instrument over the other, but if the point of an emissions trading program is to increase technological efficiency, it is necessary to continually adjust the supply of permits in response to technological change, even when the damage is linear. This continual adjustment is not needed for an emissions tax when damage is linear, which may give emissions taxes an advantage over emissions trading.
format Publications & Research :: Policy Research Working Paper
author Kennedy, Peter W.
Laplante, Benoit
author_facet Kennedy, Peter W.
Laplante, Benoit
author_sort Kennedy, Peter W.
title Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading
title_short Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading
title_full Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading
title_fullStr Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading
title_full_unstemmed Environmental Policy and Time Consistency : Emissions Taxes and Emissions Trading
title_sort environmental policy and time consistency : emissions taxes and emissions trading
publisher World Bank, Washington, DC
publishDate 2014
url http://documents.worldbank.org/curated/en/2000/05/437409/environmental-policy-time-consistency-emissions-taxes-emissions-trading
http://hdl.handle.net/10986/18852
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