The relative efficiency of market-based environmental policy instruments with imperfect compliance |
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Authors: | Sandra Rousseau Stef Proost |
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Affiliation: | (1) Centre for Economic Studies, Catholic University of Leuven, 3000 Leuven, Belgium |
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Abstract: | We study how the relative cost efficiency of three market-based instruments—emission taxes, tradable permits and output taxes—is influenced by the combination of accounting for incomplete compliance and pre-existing labor taxes. First, accounting for violations makes the policy instruments less effective so that environmental damages have to be larger to justify a policy. Secondly, including fines in a second-best setting provides a new means of collecting government revenues and of lessening existing tax distortions. We show that the relative position of grandfathered tradable permits vis-à-vis emission taxes improves considerably when incomplete compliance is incorporated in a second-best setting. A simple AGE model illustrates the results. |
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Keywords: | Environmental policy instruments Monitoring and enforcement General equilibrium model |
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