Quotas may beat taxes in a global emission game

Alfred Endres, Michael Finus

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

Economists have persistently argued that market-based instruments are better suited than command and control instruments (CAC) to achieve pollution abatement targets cost-effectively. However, this advice has not yet fallen on fertile soil. CAC is the predominant instrument in practical environmental policy. The paper attempts to give an explanation for this observation by analyzing two countries negotiating emission reductions in a world with "typical" institutional restrictions. Negotiations are assumed to be either on a uniform emission reduction quota or a uniform emission tax. Counterintuitively, it turns out that in such a second-best world an agreement under a cost-inefficient quota regime may be superior to an efficient tax agreement with respect to ecological and welfare criteria. Moreover, in contrast to a quota agreement, a tax agreement may not be feasible and stable if countries exhibit asymmetric cost-benefit structures.
Original languageEnglish
Pages (from-to)687-707
Number of pages21
JournalInternational Tax and Public Finance
Volume9
Issue number6
DOIs
Publication statusPublished - Nov 2002

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