Cap-and-Trade or carbon taxes? The feasibility of enforcement and the effects of non-compliance
Working paper
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http://hdl.handle.net/11250/180269Utgivelsesdato
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- Discussion Papers [1002]
Sammendrag
Abstract:
One of the proposed alternatives to Kyoto’s cap-and-trade approach is a regime based on an
internationally harmonized carbon tax. In this paper, we consider and compare the enforcement
problems associated with a tax regime and a cap-and-trade regime, respectively. The paper tries to
convey two main points. First, both types of regime require an effective enforcement mechanism.
However, such a mechanism is unlikely to be adopted as part of a regime with full participation,
because the political process leading up to its adoption tends to water down the enforcement
mechanism to a point where it no longer has much bite. And even if this is somehow avoided,
countries expecting compliance to be difficult or costly will almost certainly decline to sign – not to
mention ratify – the resulting agreement. Second, the implications of non-compliance in a tax regime
differ in important ways from the corresponding implications in a cap-and-trade regime. In a cap-andtrade
regime emissions trading can make inaction legitimate for buyers of emission permits. In
particular, overselling of permits by one (or a few) permit exporting countries might completely
undermine the regime’s environmental effect. In a tax regime, by contrast, one country's noncompliance
can not make inaction by other countries legitimate. It follows that an agreement based
on a harmonized carbon tax will always have some effect, provided that at least one country
complies.
Keywords: Climate agreements, compliance, enforcement, emissions trading, carbon taxes.