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Market Power and Output-Based Refunding of Environmental Policy Revenues

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  • Fischer, Carolyn

    (Resources for the Future)

Abstract

Output-based refunding of environmental policy revenues combines a tax on emissions with a subsidy to output. With imperfect competition, subsidies can discourage output underprovision. However, when market shares are significant, endogenous refunding suffers compared to a fixed subsidy. Refunding the emissions tax according to market share reduces the incentive to abate, and marginal abatement costs will not be equalized if market shares differ. In a Cournot duopoly, endogenous refunding leads to higher output, emissions, and possibly costs compared to a fixed rebate program. These results hold whether emission rates are determined simultaneously or strategically in a two-stage model.

Suggested Citation

  • Fischer, Carolyn, 2003. "Market Power and Output-Based Refunding of Environmental Policy Revenues," RFF Working Paper Series dp-03-27, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-03-27
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    More about this item

    Keywords

    emissions tax; earmarking; tradable performance standards; imperfect competition; Cournot; duopoly; refunding; subsidy;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation

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