Taxes and Tradable Permits As Instruments for Controlling Pollution: Theory and Practice

IMF Working Papers, January 1, 2000

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Taxes and Tradable Permits As Instruments for Controlling Pollution: Theory and Practice

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Bibliographic details

• Authors: John Norregaard, Valerie Reppelin
• Published: January 1, 2000
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451842999.001

Summary

• This paper examines the relative merits of two dominant economic instruments for reducing pollution—”green” taxes and tradable permits.
• Theoretically, the two instruments share many similarities, and on balance, neither seems preferable to the other.
• In practice, most countries have relied more on taxes than on permits to control pollution.
• The analysis suggests a number of lessons to be learned from country experiences regarding the design and implementation of both instruments.
• While many, particularly European countries, currently have long-term programs involving environmental taxes, a willingness to experiment with tradable permits seems to be growing, especially given the Kyoto protocol emission targets.

Key findings and themes

• Comparable theoretical effectiveness:
  • Green taxes and tradable permits share many similarities in theory.
  • On balance, neither instrument appears to be theoretically preferable to the other.
• Practical divergence:
  • Most countries have relied more on taxes than on permits in practice.
• Evolving policy interest:
  • Growing willingness to experiment with tradable permits, motivated in part by the Kyoto protocol emission targets.
• Lessons from country experience:
  • The analysis identifies a number of lessons regarding the design and implementation of both instruments (specific lessons are discussed in the paper).

Subjects and keywords

• Subject: Emissions trading, Environment, Environmental policy, Environmental taxes, Greenhouse gas emissions, Taxes
• Keywords: carbon tax, emission tax, Emissions trading, Environmental policy, Environmental taxes, Global, green tax reform, Greenhouse gas emissions, innovating firm, market structure, permits market, permits system, tradable permits, WP

Content in this bundle

• Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice - WP/00/13
  • Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice - WP/00/13 (Markdown version)
  • Taxes and Tradable Permits as Instruments for Controlling Pollution: Theory and Practice - WP/00/13 (PDF)