Multinational taxation and international emissions trading

Many studies have shown that the activities of multinational corporations are quite sensitive to differences in income tax rates across countries. In this paper I explore the interaction between multinational taxation and abatement activities under an international emissions permit trading scheme. Four types of plans are considered: (1) a single domestic permit system with international offsets; (2) separate national permit systems without trade; (3) separate national permit systems with limited offsets; and (4) an international permit trading system. For each plan, I model the incentives for the multinational firm to choose abatement activities at home and abroad and to transfer emissions credits between parent and subsidiary. Limits on trading across countries restrict efficiency gains from abatement, as is well known. But if available offset opportunities are limited to actual abatement activities, those activities are also more susceptible to distortions from incentives to shift taxable income. Transfer-pricing rules can limit but not always eliminate these distortions. In a system of unlimited international trading, abatement is efficiently allocated across countries, but tax shifting can still be achieved through intra-firm transfer pricing. From the basis of efficiency for both environmental and tax policies, the best design is an international permit trading system with transparent, enforceable transfer-pricing rules.     

Technology adoption decisions under a mixed regulatory system of tradable permits and air pollution fees for the control of Total Suspended Particulates in Taiwan

By using a newly proposed tradable permit system built under the current air pollution fee regulation for the control of Total Suspended Particulates in Taiwan as an example, a mixed-integer non-linear programming model that minimizes the total regulatory costs of firms is applied to investigate how different permit trading ratios and the design of banking might affect firms’ technology adoption decisions and permit trading behavior. By incorporating binary variables in the model to represent firms’ decisions as to whether or not to install new control equipment, the results show that when the unit air pollution fee rate is higher than the firms’ abatement costs, the design of banking causes many firms to install new control equipment that results in an over-reduction of emissions. If no air pollution fee is imposed, the trading ratio plays a more important role than the reservation rate for banking in determining the firms’ emission reduction strategies under a pure permit trading scheme. While the conclusion from this study that uses a non-uniformly mixed pollutant as an example may hold only when certain conditions are met, the framework can be applied to other uniformly mixed pollutants through parameter changes without any limitation. In addition, the modeling technique presented here offers policy-makers a very convenient approach to empirical analysis.      

Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges

A major concern with tradable emission permits is that stochastic permit prices may reduce a firm’s incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge. However, under efficient permit trading, the permit price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. We develop a rational expectations general equilibrium model of permit trading and irreversible abatement investment to show how cost uncertainties affect investment under permits. We compare the resulting investment incentive with that under charges. After controlling for the assumption that random shocks affect the abatement cost linearly, we find that firms’ investment incentive decreases in cost uncertainties, but more so under emissions charges than under permits. Therefore, tradable permits in fact may help maintain firms’ investment incentive under uncertainty.     

Real option analysis for effects of emission permit banking on investment under abatement cost uncertainty

The present paper analyzes the investment effects of emission trading scheme (ETS) when emission permits are bankable and there is technological uncertainty with regard to the abatement cost. A real option model is employed to accommodate irreversibility of investment and cost uncertainty. In the absence of abatement cost uncertainty, a bankable ETS reduces a firm's incentive for environmental investment, because the firm can utilize the banked permits for future compliance which act as substitutes for abatement investment. However, when cost uncertainty is prevalent, investment may reduce the opportunity cost of irreversible investment under the banking system, thereby increasing a firm's investment incentive. The condition is derived under which a bankable ETS provides higher investment incentives than a non-bankable ETS does.     

An experiment on emissions trading: the effect of different allocation mechanisms

In theory, efficiency and compliance levels induced by an emission trading system should not depend on the initial allocation mechanism for permits in the absence of transaction costs. In a laboratory experiment we investigate this prediction by comparing frequent and infrequent auctioning as well as two different grandfathering schemes under market rules that closely resemble those of the European Union Emission Trading System. Our experimental results suggest that, contrary to theoretical predictions, the initial allocation procedure has the potential to affect efficiency of the final permit allocation. While we do not identify an effect of the initial allocation procedure itself (auction vs. grandfathering), we observe higher final efficiency after infrequent auctioning of permits than for frequent auctioning. Surprisingly, for a grandfathering scheme that distributes permits proportional to expected needs the high initial efficiency is substantially reduced by secondary market trading. An analysis of behavioral patterns shows that permit prices and abatement levels are initially substantially higher if permits are allocated by auction and we also find more over-banking as compared to the grandfathering treatments. Treatment differences diminish in the course of the experiment.     

经济结构、技术进步与环境污染——基于中国工业行业数据的分析

文章将环境污染的影响分解为规模效应、结构效应、纯生产技术效应、纯污染治理技术效应、混合技术效应、结构生产技术效应、结构治理技术效应和综合效应,并运用37个工业行业2001-2009年三种主要废气排放数据实证分析了工业经济结构和技术进步对工业废气减排的贡献,得到如下结论:纯生产技术效应、纯污染治理技术效应在减排过程中占据了主导地位;工业经济结构的变化对工业废气减排的作用效果不明显,相对2001年甚至还加剧了环境污染;结构生产技术效应和结构治理技术效应都对废气减排起到了促进作用,环境技术进步在一定程度上弥补了工业结构的不合理。     

Quality differentiation and product innovation licensing

Evidence reveals that there are more than 50% product innovation licensings applied within industries. We study product innovation licensing (quality-enhancing licensing) in both exclusive and non-exclusive schemes each under unit/revenue royalty and fixed fee in a vertically differentiated Cournot oligopoly, where a quality-leading firm is an internal licensor. We show that, under a non-exclusive licensing, royalty licensing is the superior policy for the licensor if quality difference within firms is small, regardless of whether a unit or revenue royalty scheme is offered. Under an exclusive licensing, a two-part tariff is optimal. If fixed fee licensing is practicable, the licensor favors an exclusive licensing. Furthermore, an increase in quality difference within firms increases the optimal rates. Using the simulated results, we examine that licensing improves social welfare in all schemes, and the number of licensees will influence the magnitude of welfare enhancement.     

Carbon Abatement and International Spillovers

Carbon abatement policies in large open economies affect both the allocation of domestic resources and international market prices. A change in international prices implies an indirect secondary burden or benefit for all trading countries. Based on simulations with a large-scale computable general equilibrium model of global trade and energy use, we show that international spillovers have important welfare implications for carbon abatement policies designed to meet exogenous emission reduction targets. We present a decomposition of the total welfare effect of carbon abatement policies into a primary domestic market effect (at constant international prices) and a secondary international spillover impact as a result of changes in international prices. This decomposition reveals the extent to which domestic abatement costs are increased or decreased as a result of the impact of carbon abatement on international prices.     

Redistribution and Small Coalitions of Friends

When side marketing trade is perfect, linear taxation of retradeable commodities is the only scheme that survives attempts to arbitrage. In this paper, I discuss tax schemes when side trading is imperfect in the sense that commodities can only be re-exchanged within coalitions no larger than two people. In the framework of a two-class economy, I identify coalitions which might have an incentive to form and provide a characterisation for the Pareto-efficient tax scheme. The tax formula has a very simple form and strongly resembles the formula for the no-side-trade case. In a numerical exercise, the constraints imposed on policy by an imperfect side trading process are found to be almost as tough as those imposed by perfect side trading.     

Industry-level emission trading between power producers in the EU

This paper investigates how restrictions for emission trading to the energy-intensive power sector will affect the magnitude and distribution of abatement costs across EU countries vis-à-vis a comprehensive EU emission trading regime. It is found that emission trading between European power sectors allows the harvest of a major part of the efficiency gains provided by full trade as compared to strictly domestic action. However, trade restrictions may create a more unequal distribution of abatement costs across member states than is the case for a comprehensive trade regime. The reason for this is that restricted permit trade enhances secondary terms-of-trade benefits to EU member countries with low marginal abatement costs at the expense of the other EU member states.     

Investment Incentives Under Emission Trading: An Experimental Study

This paper presents the results of an experimental investigation on incentives to adopt advanced abatement technology under emissions trading. Our experimental design mimics an industry with small asymmetric polluting firms regulated by different schemes of tradable permits. We consider three allocation/auction policies: auctioning off (costly) permits through an ascending clock auction, grandfathering permits with re-allocation through a single-unit double auction, and grandfathering with re-allocation through an ascending clock auction. Our results confirm both dynamic and static theoretical equivalence of auctioning and grandfathering. We nevertheless find that although the market institution used to reallocate permits does not impact the dynamic efficiency from investment, it affects the static efficiency from permit trading.     

Royalty reform and illegal reporting of harvest volumes under alternative penalty schemes

We study royalty reform in a timber concessions framework. Illegal logging in the form of underreporting of harvesting is modeled. Harvesters can be either risk neutral or risk averse. Detection of illegal logging by the government is imperfect and costly. We focus on the government’s policy problem, solving first for socially optimal royalty and auditing levels, and then examining a revenue-neutral reform toward this benchmark. We find that higher royalty progression will always decrease actual harvest volume regardless of risk preferences for the harvester, but the effect of a reform on reported harvest volume is sensitive to the penalty scheme imposed by the government. If the fine is levied on evaded royalty payments, then higher royalty progression may increase reported harvest volume. But when the fine is levied on undeclared harvest volume, the reverse happens. Higher royalty regression increases actual harvest volume under both penalty schemes, but it may decrease reported harvest volume. Higher regression will increase undeclared harvest volume when the fine is levied on evaded royalty payments.      

Contingent certificate allocation rules and incentives for power plant investment and disinvestment

The electricity generation mix of many countries is strongly dominated by fossil fuelled power plants. \(\hbox {CO}_{2}\) certificate trading is then advocated as a first best instrument for emission abatement in Europe, the US and beyond. An important element of the trading scheme is the initial allocation of allowances. This article is to show how permit allocation rules, applied within an Emission Trading System (ETS), interfere with the long-term pricing and investment on power markets. In particular it is demonstrated that free allocation of certificates contingent on plant availability and fuel used is likely to provide distorting incentives both for continued operation of existing plants and for investments. Consequently, marginal abatement costs within the ETS are increased above efficient levels and new power plant investments may crowd out excessively older power plants. Analytical results are derived for two technology cases and a numerical case study is devoted to the EU 27 power sector.     

Impacts of EU carbon emission trade directive on energy-intensive industries — Indicative micro-economic analyses

The cost impacts from the European emission trading system (ETS) on energy-intensive manufacturing industries have been investigated. The effects consist of direct costs associated to the CO₂ reduction requirements stated in the EU Directive, and of indirect costs of comparable magnitude that originate from a higher electricity price triggered by the ETS in the power sector. The total cost impacts remain below 2% of the production value for most industries within the ETS in the Kyoto period. In the post-Kyoto phase assuming a 30% CO₂ reduction, the total cost impact may raise up to 8% of production value in the heaviest industry sectors. In steel and cement industries the cost impacts are 3-4 fold compared to the least affected pulp and paper and oil refining. Electricity-intensive industries outside the ETS will also be affected, for example in aluminum and chlorine production the indirect cost impacts from ETS could come up to 10% of production value already in the Kyoto period. As industry sectors are affected differently by the ETS some correcting mechanisms may be worthwhile to consider in securing the operation of the most electricity-intensive sectors, e.g. balancing taxation schemes that may include as income source a levy on the wind-fall profits of the power sector due to ETS. A future improvement in ETS for industries within the scheme could be scaling of the emission reduction requirement so that the relative total emission reduction costs are at about the same level.     

Intertemporal Emission Permits Trading Under Uncertainty and Irreversibility

This paper analyzes the effect of emission permit banking on clean technology investment and abatement under conditions where the stringency of the future cap is uncertain. We examine the problem of heterogeneous firms minimizing the cost of intertemporal emission control in the presence of stochastic future pollution standards and emission permits that are tradable across firms and through time. A firm can invest in clean capital (an improved pollution abatement technology) to reduce its abatement cost. We consider two possibilities: that investment is reversible or irreversible. Uncertainty is captured within a two period model: only the current period cap is known. We show that if banking is positive and marginal abatement costs are sufficiently convex, there will be more abatement and investment in clean technology under uncertainty than there would be under certainty and no banking. These results are at odds with the common belief that uncertainty on future environmental policy is a barrier to investment in clean capital. Moreover, under uncertainty and irreversibility, we find that there are cases where banking enables firms to invest more in clean capital.     

排污权交易政策对企业环保行为的传导机制研究

从企业的目标函数和生产函数两个角度出发,分析了排污权交易政策对企业环保行为的影响机理,并讨论了排污权交易政策下企业的环保行为选择。研究发现：排污权交易政策通过影响企业的资本要素分配,从而影响企业环境资源的使用成本,进而影响企业的生产和环保行为决策;在排污权交易政策的作用下,企业主要采取不同的污染治理投资策略来满足该政策的规制。基于此,政府应制定配套政策和措施,引导企业沿着“政策遵从—环保投资策略—新环保技术采纳”的行为选择路径进行行为决策,以实现排污权交易政策的目标。     

Investment and emission control under technology and pollution externalities

This paper studies incentives to develop advanced pollution abatement technology when technology may spillover across agents and pollution abatement is a public good. We are motivated by a variety of pollution control issues where solutions require the development and implementation of new pollution abatement technologies. We show that at the Nash equilibrium of a simultaneous-move game with R&D investment and emission abatement, whether the free rider effect prevails and under-investment and excess emissions occur depends on the degree of technology spillovers and the effect of R&D on the marginal abatement costs. There are cases in which, contrary to conventional wisdom, Nash equilibrium investments in emissions reductions exceed the first-best case.     

Permit Trading and Credit Trading: A Comparison of Cap-Based and Rate-Based Emissions Trading Under Perfect and Imperfect Competition

This paper compares emissions trading based on a cap on total emissions (permit trading) and on relative standards per unit of output (credit trading). Two types of market structure are considered: perfect competition and Cournot oligopoly. We find that output, abatement costs and the number of firms are higher under credit trading. Allowing trade between permit-trading and credit-trading sectors may increase welfare. With perfect competition, permit trading always leads to higher welfare than credit trading. With imperfect competition, credit trading may outperform permit trading. Environmental policy can lead to exit, but also to entry of firms. Entry and exit have a profound impact on the performance of the schemes, especially under imperfect competition. We find that it may be impossible to implement certain levels of total industry emissions. Under credit trading several levels of the relative standard can achieve the same total level of emissions.     

The Tin Crisis (1985-86) and Futures Trading

A succession of six international tin agreements operated from 1956 to 1985. Futures trading in tin continued in London until the buffer stock scheme, without cash or the support of its sponsoring governments, collapsed in October 1985. The implications of the tin experience for futures trading and for so-called commodity stabilization schemes are examined     

Efficient Dynamic Pollution Taxation in an Uncertain Environment

This paper analyzes efficient pollution taxation within a stochastic model of endogenous growth. Pollution is a by-product of production and causes disutility. Furthermore, the productivity which results from environmental quality is uncertain. This reflects e.g. uncertain capital depreciation induced by natural disasters like hurricanes or floods. This uncertainty is shown to raise an ambiguous impact on the optimal pollution level as well as on optimal environmental taxation. Market equilibrium turns out to be suboptimal, since the households mis-perceive their individual impact on pollution. Conditions for welfare maximizing pollution taxation are stated and it is shown that a direct pollution tax is not appropriate to yield Pareto-optimal growth. Instead, a linear capital income tax together with a linear abatement subsidy build an efficient tax scheme, if secondarily the governmental budget is balanced. Moreover, an increase in the riskiness of environmental productivity may even lead to an increase in the optimal pollution level and to a decrease in optimal environmental taxation, depending predominantly on the preference parameters.