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Reducing Greenhouse Gas Emissions With a Tax or a Cap: Implications for Efficiency and Cost Effectiveness

Dinan, Terry M.

Abstract:

This paper compares a tax on greenhouse gas emissions with a cap-and-trade program for reducing those emissions. The comparison is made on the basis of two criteria: economic efficiency and cost effectiveness. If there were an accepted measure of the marginal benefit of reducing a ton of greenhouse gas emissions, a tax would clearly be advantageous from an efficiency perspective. Comparing the two policies on the basis of cost effectiveness is more complicated. This paper defines the characteristics of a costminimizing price path and then examines the ability of an adjustable tax and two alternative designs of a cap-and-trade program to create such a price path.

Citation

Dinan, Terry M. (2009), Reducing Greenhouse Gas Emissions With a Tax or a Cap: Implications for Efficiency and Cost Effectiveness, National Tax Journal, 62:3, pp. 535-53

DOI: dx.doi.org/10.17310/ntj.2009.3.11