Limiting CO2 emissions: markets versus taxes

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ECONOMIC POLICY – UNIVERSITY PARIS I – 2012-13
Presentation #14: Limiting CO2 emissions: markets versus taxes
Under perfect information and absent transaction costs, the Coase theorem suggests that it is
equivalent to curb carbon emissions through Pigovian taxes or with a cap-and-trade system.
Under imperfect information, though, these solutions differ. Taxes help setting the marginal
price of carbon with an uncertain effect on emissions, whereas cap-and-trade helps setting the
volume of emissions with an uncertain effect on price. In 2003, the European Union opted for
a market solution with the Emissions Trading Scheme (ETS). Since its start in 2005, however,
the ETS has been plagued with high price volatility, asymmetric information and even fraud.
In turn, ‘Pigovian’ carbon taxes have been experimented in several countries, although in
France it was rejected by the Constitutional Court in December 2009.
Suggested issues for discussion:
Based on past experiences (including the US market for SO2 emissions), compare the
experiences with cap-and-trade and with taxes along different criteria (efficiency, cost,
controllability, equity…).
Describe the European ETS. Has it proved efficient so far in terms of price discovery and
effectiveness in achieving emission reduction targets? What are the challenges post-2012?
Can Pigovian taxes and cap-and-trade schemes be designed to promote growth?
Indicative references (the most recommended readings are denoted by a star)
*Baumol, W., and W. Oates (1971), “The role of standards and prices for protection of the
environment”, Swedish Journal of Economics, pp. 42-54.
*Coase, R.H. (1960), “The problem of social cost”, Journal of Law and Economics No.3.
*Euractiv (2011), “EU locks carbon market after security breach,” 20 January.
*OECD (2010), “Taxation and green growth”, Working Party No. 2 on Tax Policy Analysis
and Tax Statistics, CTPA/CFA/WP2 (2010) 26.
*Pierce, D. (1991), “The role of carbon taxes in adjusting global warming,” The Economic
Journal, 101 (407), pp. 938-48.
*Rocard, M. (2009) (sous la direction de), Rapport de la conférence des experts et de la table
ronde sur la contribution Climat et Énergie, 28 juillet.
*Schmalensee R., P. Joskow, A. Denny Ellerman, J.P. Montero and E. Bailey (1998), “An
Interim Evaluation of Sulfur Dioxide Emissions Trading,” Journal of Economic
Perspectives, Vol. 12, No. 3, pp. 53-68.
Bureau, D. and M. Mougeot (2004), “Politiques environnementales et compétitivité”, Rapport
du Conseil d’Analyse Economique n°53, sur www.cae.gouv.fr.
Capros, P., L. Mantzos, V. Papandreou and N. Tasios (2008), “Model-based analysis of the
2008 EU policy package on climate change and renewables,” report to the European
Commission DG Environment, E3MLab and NTUA.
Delbosc, A. and Ch. de Pethuis (2009), Les marchés du carbone expliqués, Université Paris
Dauphine and Caisse des Dépôts et Consignations.
The Economist (2010), “The wrong sort of recycling. Hungary’s sale of carbon credits
damages investor confidence,” 25 March.
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Henry, C. and L. Tubiana (2000), “Instruments économiques dans la perspective du
changement climatique,” Economie et Prévision, n°143-144.
Stern, Sir N. (2006), Stern Review: The Economics of Climate Change, Report to the UK
Prime Minister and the Chancellor of the Exchequer.
Data
Caisse des Dépôts et Consignations et Ministère de l’écologie, Chiffres clés du climat en
France et dans le monde.
The World Bank, State and Trends of the Carbon Markets.