No abstract

Environmental issues during and after production are a major issue in contemporary exhaustible resource production. Production deteriorates the state of the environment and is a source of possibly harmful emissions. After the production has ceased, the production site is in need of rehabilitation. This paper analyzes the last two stages of exhaustible resource production: The production and rehabilitation decisions. The socially optimal regulation is investigated, and it is found that a pollution tax, a shut-down date and a requirement for the firm to deposit funds for costly rehabilitation with a profit tax are enough for the socially optimal extraction profile. It is also found that it is irrelevant from the social point of view when the firm pays the funds.

We study the welfare ranking of an emission tax and emissions trading when firms self-report their emissions to the regulator and may be noncompliant. We allow for the subjective probabilities of auditing, and using conventional assumptions find that an emissions tax produces a higher level of welfare than emissions trading under noncompliance. The main driver of the result is that the compliance pattern of the firms affects the marginal compliance cost (price of emissions) in the case of permits, thus affecting the level of emissions and welfare. The result also holds when enforcement and sanctioning costs are taken into account and differs from the result found by Montero (2002, Journal of Public Economics). We also show that the ranking may be reversed if these costs are taken into account and the regulator must audit at least one firm. We also analyze the welfare ranking when the expected penalties depend on relative violations.