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The Welfare Effects of Carbon Policies: Grandfathered Quotas versus Differentiated Taxes

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Abstract

Recently, it has been demonstrated that pre-existing distortionary taxes can substantially increase the costs of market-based instruments which do not raise revenue, such as non-auctioned emissions quotas. Revenue-raising market-based policy tools, such as carbon taxes, encounter other problems: The redistribution of property rights implied by introduction of such instruments is politically controversial, and in practice, tax rates are often differentiated to reduce political resistance. In the latter case, marginal abatement costs are not equalized between polluters. When comparing a policy with differentiated carbon taxes to a policy of free-issued quotas, financed through distortionary taxes, it is thus not obvious which alternative yields the highest social welfare. In this paper, we use a numerical intertemporal general equilibrium model for the Norwegian economy to compare the welfare effects of a differentiated carbon tax regime, exemplified by the current Norwegian carbon tax structure; a system of grandfathered tradable emission permits; and a uniform carbon tax regime. Grandfathered tradable quotas yield substantially lower welfare than the other two alternatives. However, differentiated taxes produce almost as high welfare as uniform taxes.

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  • Brita Bye & Karine Nyborg, 1999. "The Welfare Effects of Carbon Policies: Grandfathered Quotas versus Differentiated Taxes," Discussion Papers 261, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:261
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    1. Bruvoll, Annegrete & Larsen, Bodil Merethe, 2004. "Greenhouse gas emissions in Norway: do carbon taxes work?," Energy Policy, Elsevier, vol. 32(4), pages 493-505, March.
    2. Brita Bye & Snorre Kverndokk & Knut Rosendahl, 2002. "Mitigation costs, distributional effects, and ancillary benefits of carbon policies in the Nordic countries, the U.K., and Ireland," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 7(4), pages 339-366, December.
    3. Kverndokk,S. & Rosendahl,E., 2000. "CO2 mitigation costs and ancillary benefits in the Nordic countries, the UK and Ireland : a survey," Memorandum 34/2000, Oslo University, Department of Economics.
    4. Burtraw, Dallas & Cannon, Matthew, 2000. "Heterogeneity in Costs and Second-Best Policies for Environmental Protection," Discussion Papers 10875, Resources for the Future.

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    More about this item

    Keywords

    Dynamic equilibrium analysis; Free issued quotas; Environmental tax reforms.;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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