A second-best evaluation of eight policy instruments to reduce carbon emissions

This paper uses a numerical general equilibrium model to compare the costs of alternative policies for reducing carbon emissions in a second-best setting with a distortionary tax on labor. We examine a carbon tax, two energy taxes, and both narrow-based and broad-based emissions permits and performance standards. The presence of pre-existing tax distortions raises the costs of all these policies, and can affect their relative cost rankings. In fact, the superiority of emissions taxes and emissions permits over other instruments can hinge on whether these policies generate revenues that are used to reduce other distortionary taxes.