KYOTO Protocol Revisited

New working paper from Yale. The excerpts are a bit wonkish, but I thought it might be of interest to those who follow global warming policy arguments. Is it better to impose emission caps or limits (a la Kyoto), or are taxes and fees more effective? The author gives 5 reasons why fees and/or taxes will lead to more reductions. I especially think the 5th reason is the most persuasive: more goverments will prefer to collect fees and taxes, rather than spend on the monitoring and enforcement systems required by having caps.

Designing an international greenhouse emission plan implies the choice between two alternative policies: the imposition of specific limits on the quantity of each country's emissions or the use of prices, fees, or taxes as an incentive to reduce emissions. The author’s analysis demonstrates that the second policy is preferable: not only is it simpler to implement but it is also more efficient economically. In fact, the author shows that since technological progress is uncertain and emission reduction techniques vary worldwide, internationally harmonized carbon taxes will help to reach policy targets at a lower cost.

... With this accurate, original analysis the author shows that harmonized carbon taxes are very useful, flexible and efficient mechanisms in environmental planning: will world leaders be convinced as well?

This form of taxation is preferable to quantity limits for different reasons:

• First, introducing an international carbon-tax system is simpler than setting quantity limits and regulating the permits market.

• ... Second, taxes are more flexible than quantity limits.

• ... Third, the author proves that a harmonized carbon-tax system is economically more efficient than a quantity cap.

• ... Fourth, a further point in favor of carbon taxes is tied to the evolution of permission prices over time. Since the demand for and supply of permits is quite inelastic in the short term, it is very likely that their trading prices will fluctuate a lot.

• ... A fifth advantage of a tax system mechanism is its positive effect on government budgets. In fact, from governments' point of view a quantity limit only generates costs (due to monitoring emissions and trading of permits), while a price mechanism compensates these monitoring costs with a certain revenue. This tax revenue may constitute a significant incentive for governments to join the scheme and may therefore increase the impact of the policy on global warming.