Edited by Larry Kreiser, Ana Yábar Sterling, Pedro Herrera, Janet E. Milne and Hope Ashiabor
Chapter 15: Carbon-energy tax, emission permits and border tax adjustments
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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