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Chapter 12

Chapter 12 EC238.docx

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EC238 Chapter 12Emission Taxes and Subsidies Week 7 Emission TaxesSubsidies The most straightforward incentivebased approach to controlling emissions of a particular residual is to have a public agency offer a financial incentive to change those emissionsDone in two waysTaxing each unit of emissions Giving a subsidy for each unit of emissions that the source cuts backEmission taxes imply that polluters are able to discharge any amount of the taxed pollutant they wish but they will be required to pay a tax for every unit dischargedThe essence of the tax approach is to provide an incentive for the polluters themselves to find the best way to reduce emissions rather than having a central authority determine how it should be doneTotal private cost of compliance of an emission tax is defined as the sum of abatement costs and the tax bill for the polluter Polluters will minimize their total private costs by reducing emissions until the tax rate equals their marginal abatement costIn competitive situations higher taxes will bring about greater reductions in emissions Social costs of compliance include only the real resources used to meet the environmental target they do not include the tax billTaxes are actually transfer payments payments made by the polluters to the public sector and eventually to those in society who are benefited by the resulting public expendituresNet social benefits of a policy are defined as the total damages forgone net of the social costs of compliance The lower the emissions the lower the ambient concentration of the pollutantIf we apply the same tax rate to different sources with different marginal abatement cost functions and each source reduces its emissions until their marginal abatement costs equal the taxThe imposition of an emission tax will automatically satisfy the equimarginal principle becaus
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