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EU-Type Carbon Emissions Trade and the Distributional Impact of Overlapping Emissions Taxes

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Document pages: 36 pages

Abstract: The European Union fulfills its emissions reductions commitments by means of an emissions trading scheme covering some part of each member state s economy and by national emissions control in the rest of their economies. The member states also levy energy emissions taxes overlapping with the trading scheme. Restricting our focus on cost-effective policies, this paper investigates the distributive consequences of increasing the overlapping emissions tax that is uniform across countries. For quasi-linear utility functions and for a class of parametric utility and production functions emissions tax increases turn out to be exactly offset by permit price reductions. As a consequence permit-exporting [permit-importing] countries lose [gain] from an increase in the emissions tax. These results are not general, however. By means of a numerical example we show that export-import reversals and welfare reversals are possible.

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