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Carbon Pricing, Growth and the Environment

Carbon Pricing, Growth and the Environment

Critical Issues in Environmental Taxation series

Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor

The emphasis of the book lies in finding critical solutions to global climate change including chapters on environmental fiscal reform and unemployment in Spain, EU structural and cohesion policy and sustainable development, ecological tax reform in Europe and Asia, Australia’s carbon pricing mechanism, and many other timely topics.

Chapter 15: Carbon-energy tax, emission permits and border tax adjustments

Alberto Majocchi

Subjects: economics and finance, environmental economics, public finance, environment, climate change, environmental economics, law - academic, tax law and fiscal policy


There is a growing agreement among economists that, in defining the best policy option to control global warming and to fight climate changes, economic instruments allow the achievement of the goal of curbing greenhouse gas emissions at a lower cost than would be possible through standards and regulations. But among the economic instruments a choice should be made between price instruments (Kahn, 1998), such as a carbon tax, and quantity instruments, such as emission permits. ‘In an environment of complete knowledge and perfect certainty there is a formal identity between the use of prices and quantities as planning instruments’ (Weitzman, 1974: 480). This is the basic assumption of the classical approach that goes back to Weitzman (1974). But since asymmetric information is the rule and not the exception, a choice must be made. According to Weitzman, the choice of the optimal instrument depends on the relative slope of the damage and cost functions. In particular, if the slope of the marginal costs is steeper, price controls are more effective, and if the relative slope of marginal damages is steeper, than quantity controls are more effective. According to Roberts and Spence (1976), the shape of the damage and cost functions changes with the amount of abatement. This means that the choice of the optimal instruments can also be influenced.

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