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The Fiscal Incentive of GHG Cap and Trade: Permits May Be Too Cheap and Developed Countries May Abate Too Little

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  • J rgen Juel Andersen
  • Mads Greaker

Abstract

The theoretical justi cation for a greenhouse gas (GHG) cap and trade system is that participants will trade emission permits until their marginal cost of abatement equals the equilibrium price of emission permits. However, for scally constrained governments this logic does not apply, as they have a scal incentive to let welfare concerns, rather than industrial cost effciency, guide their abatement policy. Then, global cost e ciency will fail even if just a (small) subset of governments are scally constrained. Finally, we argue that any institutional change which breaks the connection between a government s abatement policy and its budget will increase welfare.

Suggested Citation

  • J rgen Juel Andersen & Mads Greaker, 2014. "The Fiscal Incentive of GHG Cap and Trade: Permits May Be Too Cheap and Developed Countries May Abate Too Little," Working Papers No 9/2014, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    • Handle: RePEc:bny:wpaper:0027
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    References listed on IDEAS

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    More about this item

    Keywords

    environmental policy; fiscal icentive; fiscal constraints; GHG cap and trade; welfare;
    All these keywords.

    JEL classification:

    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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