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A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities

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  • Arthur Caplan

Abstract

This paper provides an answer to the question: Are emission taxes an efficient and self-enforcing mechanism to control correlated externality problems? By “correlated externalities” we mean multiple pollutants that are jointly produced by a single source but cause differentiated regional and global externalities. By “self-enforcing” we mean a mechanism that accounts for the endogeneity that exists between competing jurisdictions in the setting of environmental policy within a federation of regions. This mechanism incorporates sequential decision making among the jurisdictions and therefore determines an equilibrium based on the concept of subgame perfection. We find that, unlike joint domestic and international tradable permit markets, joint emission taxes and a hybrid scheme of permits and taxes are neither efficient nor self-enforcing. Copyright Springer 2006

Suggested Citation

  • Arthur Caplan, 2006. "A Comparison of Emission Taxes and Permit Markets for Controlling Correlated Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 34(4), pages 471-492, August.
    • Handle: RePEc:kap:enreec:v:34:y:2006:i:4:p:471-492
    DOI: 10.1007/s10640-006-0010-3
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    Cited by:

    1. Jing Xu, 2018. "International environmental agreements with agenda and interaction between pollutants," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 18(2), pages 153-174, April.
    2. Zylicz, Tomasz, 2010. "Goals and Principles of Environmental Policy," International Review of Environmental and Resource Economics, now publishers, vol. 3(4), pages 299-334, May.
    3. John K. Stranlund & Insung Son, 2019. "Prices Versus Quantities Versus Hybrids in the Presence of Co-pollutants," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(2), pages 353-384, June.
    4. Meier, Jan-Niklas & Lehmann, Paul, 2022. "Optimal federal co-regulation of renewable energy deployment," Resource and Energy Economics, Elsevier, vol. 70(C).
    5. Camille Regnier & Sophie Legras, 2018. "Urban Structure and Environmental Externalities," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 70(1), pages 31-52, May.
    6. Woodward, Richard T., 2011. "Double-dipping in environmental markets," Journal of Environmental Economics and Management, Elsevier, vol. 61(2), pages 153-169, March.
    7. Oladi, Reza & Caplan, Arthur J. & Gilbert, John, 2018. "Sequestration and the engagement of developing economies in a global carbon market," Resource and Energy Economics, Elsevier, vol. 52(C), pages 50-63.
    8. Legras, Sophie, 2010. "Managing correlated stock externalities: water taxes with a pinch of salt," Environment and Development Economics, Cambridge University Press, vol. 15(3), pages 275-292, June.
    9. Geiger, Charlotte & Lehmann, Paul, 2021. "Managing the spatial externalities of renewable energy deployment: Uniform vs. differentiated regulation," UFZ Discussion Papers 1/2021, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).

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    More about this item

    Keywords

    correlated externalities; hybrid scheme; joint emission taxes; joint permits; C72; D62; D78; H41; H77; Q28;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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