Emissions taxes versus intensity standards: Second-best environmental policies with incomplete regulation

Abstract

a b s t r a c tThe best emissions tax or emissions cap may be an inferior instrument under incomplete regulation (leakage). Without leakage, an intensity standard (regulating emissions per unit of output) is inferior due to an implicit output subsidy. This inefficiency can be eliminated by an additional consumption tax. With leakage, an intensity standard can dominate the optimal emissions tax, since the implicit output subsidy prevents leakage. The addition of a consumption tax improves an intensity standard's efficiency, may prevent leakage, and may be efficient. Comparing intensity standards to output-based updating shows that the latter dominates if updating is sufficiently flexible.

. Spillovers from Climate Policy to Other Pollutants

“…Decomposing responses into output and substitution effects is also useful since output effects may not be effective for reducing emissions if regulations are incomplete or fi rms have market power. See Holland (2012) for further discussion of output effects with incomplete regulation.…”

Solving the Clinker Dilemma with Hybrid Output-Based Allocation

“…Fifth, with output reduction lower than the social optimum, in the absence of other market failures, OBA raises the overall costs to meet a given emissions reductions target (Fischer 2001;Haites 2003). However, in the presence of market failures such as imperfect coverage (Bernard et al 2007;Holland 2012), tax interactions (Goulder 2002) or imperfect competition (which calls for a carbon tax lower than the marginal damage, as pointed out by Buchanan (1969)), OBA (representing the combination of emissions pricing and production subsidy) may be welfare-enhancing in theory (Gersbach and Requate 2004;Fischer 2011).…”

A Proximate Mirror: Greenhouse Gas Rules and Strategic Behavior Under the US Clean Air Act

“…Consumers may prefer to coordinate around a tradable performance standard that provides incentives for production because it affects on the variable cost of the marginal electricity generator and thereby affects prices, while producers may prefer to coordinate around cap and trade with revenues used to provide incentives for consumption (Burtraw et al 2006) or not to coordinate . Holland (2012) shows that outputbased allocation can dominate a tradable performance standard (in its economic efficiency) if it can mimic the optimal combined emissions price and output subsidy. The potential superiority of output-based allocation, Holland notes, can be attributed to its flexibility.…”

“…We note that the CPP allows states such flexibility. Although economic costs vary under different policy combinations, they are expected to be lowest under a coordinated approach (Holland 2012), if that approach can be sustained.…”