National Tax Journal

Reducing Greenhouse Gas Emissions with a Tax or a Cap: Implications for Efficiency and Cost Effectiveness

Terry M. Dinan

62 National Tax Journal 535-53 (September 2009)

Abstract:

This paper compares a tax on greenhouse gas emissions with a cap-and-trade program for reducing those emissions. The comparison is made on the basis of two criteria: economic efficiency and cost effectiveness. If there were an accepted measure of the marginal benefit of reducing a ton of greenhouse gas emissions, a tax would clearly be advantageous from an efficiency perspective. Comparing the two policies on the basis of cost effectiveness is more complicated. This paper defines the characteristics of a costminimizing price path and then examines the ability of an adjustable tax and two alternative designs of a cap-and-trade program to create such a price path.

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