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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World Bank, Washington, DC
2014
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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 |
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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 |
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World Bank |
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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 |
_version_ |
1764441631374704640 |