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Are Differentiated Carbon Taxes Inefficient? A General Equilibrium Analysis

Abstract:
Revenue-raising environmental policy instruments, such as carbon taxes, tend to be politically controversial. In practice, carbon taxes are often differentiated between polluters, implying unequal marginal abatement costs. Grandfathered tradeable permits seem less controversial; this instrument yields equal marginal abatement costs, but does not raise revenue. We compare a system of differentiated carbon taxes, exemplified by the current Norwegian carbon tax regime, to uniform carbon taxation and grandfathered tradeable emission permits. In this particular case, differentiated taxes are welfare superior to grandfathered permits. Nevertheless, uniform carbon taxes outperform both.

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Energy Specializations: Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Policy and Regulation

JEL Codes: Q53: Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling, Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects, Q35: Hydrocarbon Resources, Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources

Keywords: Energy equilibrium analysis, Free issued quotas, Environmental tax reforms, Carbon tax, Norway

DOI: 10.5547/ISSN0195-6574-EJ-Vol24-No2-4


Published in Volume24, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.