Taxes versus quotas for a stock pollutant

Abstract

We compare the effects of taxes and quotas for an environmental problem in which the regulator and polluter have asymmetric information about abatement costs, and the environmental damage depends on the stock of pollution. We thus extend, to a dynamic framework, previous studies in which environmental damages depend on the flow of pollution. As with the static analysis, an increase in the slope of the marginal abatement cost curve, or a decrease in the slope of the marginal damage curve, favors taxes. In addition, in the dynamic model, an increase in the discount rate or the stock decay rate favor the use of taxes. Taxes certainly dominate quotas if the length of a period during which decisions are constant is sufficiently small. An empirical illustration suggests that taxes dominate quotas for the control of greenhouse gasses.

Taxes versus quantities for a stock pollutant with endogenous abatement costs and asymmetric information

“…This expression reproduces a result in Weitzman (1974)'s static model and in two dynamic models (Hoel and Karp 2002;Karp and Zhang 2005). If ρ = 0 and ψ = 0, the payoff difference equals…”

“…This analysis has been undertaken with the competing assumptions that the regulator announces the entire sequence of future policies today (the open loop assumption) (Newell and Pizer 2003) or that the regulator conditions future policies on future information (the feedback assumption) (Hoel and Karp 2002;Karp and Zhang 2005), and under the assumption that the regulator expects to learn about a damage parameter (Karp and Zhang 2006). This analysis, together with available estimates of parameter values, supports the view that taxes dominate quotas for climate policy.…”

“…Second, even if the possibility of extreme events makes the marginal damage function much steeper than current estimates suggest, the magnitude of the slope of damages would have to be implausibly large to favor quotas. (Hoel and Karp (2002) demonstrate both of these claims.) Third, the current paper shows that endogenous investment in abatement capital is likely to increase the advantage of taxes, given the linear-quadratic framework.…”

“…Previous papers study the relation between the policy ranking and parameters in the linear-quadratic model with additive errors (Hoel and Karp 2002;Newell and Pizer 2003;Karp and Zhang 2005). Those papers show that the difference in payoffs under optimal taxes and quotas, J T − J Q , is decreasing in g b .…”

Optimal emission-extraction policy in a world of scarcity and irreversibility

“…These values are taken from Karp and Zhang (2012), whose estimates are consistent with the values used by other related papers, dealing with the optimal regulation of GHG, and more specifically CO 2 , emissions (see Hoel and Karp, 2002, Liski, 2002, Karp and Zhang, 2005. It is worth mentioning that all these papers ignore resource scarcity and work in discrete time, except Liski (2002) whose numerical analysis relies on an earlier version of Hoel and Karp (2002). One has to be careful when passing from discrete to continuous time models, because for instance, our y corresponds to a rate of emission or extraction, not to a level.…”