Emissions taxes vs. intensity standards revisited: a general equilibrium analysis

UNCG Author/Contributor (non-UNCG co-authors, if there are any, appear on document)
Katherine M. Antonio (Creator)
The University of North Carolina at Greensboro (UNCG )
Web Site: http://library.uncg.edu/
Stephen Holland

Abstract: This dissertation applies general equilibrium techniques to the comparison of two applied environmental policies that are designed to reduce CO2 emissions: the cap and trade regulatory mechanism and the emissions per output regulatory mechanism. The main objective of this research is to analyze whether one regulation performs better in terms of maximizing overall welfare, applying a general equilibrium framework. Previous research on the effectiveness of environmental policies is inconclusive. The application of general equilibrium analysis contributes to the current literature on the effectiveness of environmental policies, particularly in circumstances in which emissions can leak into other economic sectors or countries. I conclude that under certain conditions – the separability of inputs in a concave production function and emissions leakage – the optimal policy should regulate emissions per unit of output instead of imposing a cap on emissions. In the main model of this dissertation unilateral cap and trade policies are unable to replicate the first best, and, more importantly, can be an inferior instrument for regulating emissions than a unilateral intensity standard policy. This finding might explain why local policies that regulate emissions per output are in place when there is leakage and a lack of coordination among agents. The results suggest important general equilibrium effects on labor and capital markets. The hypothetical case of regulating the fossil fuel industry unilaterally in the U.S. shows that a country that regulates will implicitly pay higher endogenous carbon prices than with harmonized cases. Unilateral and incomplete regulation is costly, both in terms of facing larger endogenous carbon prices and in terms of factor reallocation of capital and labor to unregulated industries and regions. Harmonization of policies across regions and sectors is always preferred, as such policies elicit larger overall welfare. Furthermore, the choice of the regulatory instrument determines the size of the effects. I find evidence that intensity standards are superior to cap and trade mechanisms for incomplete and unilateral regulation cases.

Additional Information

Language: English
Date: 2021
Cap and Trade, Emissions, General Equilibrium, Incomplete Regulation, Intensity Standards, Leakage
Carbon dioxide mitigation $x Economic aspects
Emissions trading $x Economic aspects

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