Instrument Choice: Regulation and Taxes

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Command and control regulation of emissions is useful because it can be imposed unilaterally by the regulator, and because it sets an emissions quota. Emissions taxation does not set a quota, but taxes are also seen to be a more cost-effective instrument, because marginal abatement costs are equalized across all sources of the pollutant in question.

In addition, where regulation is revenue-consuming, taxation is revenue-raising. As a revenue-raising instrument, taxes have distortionary effects. Some literature has focused on the “double-dividend” effect of emissions taxation, wherein benefits accrue both in the form of reduced emissions, and in the form of revenue that can be used to offset the distortionary effects of other taxes (by lowering them, for example).

Generally, taxes have been used more often in the OECD countries. At times, they have been politically contentious because, it is argued, they impose greater costs on producers and thereby cause unemployment.

With both taxes and regulation, the effectiveness of the instrument is connected to the ability of regulators to monitor emissions. In some cases neither a tax nor a regulation can be imposed, because it is not possible to accurately measure emissions, or because the cost of measuring emissions is greater than the cost of those emissions to the environment. In other cases where emissions can be measured roughly but not precisely, it may be that regulation, which only needs to detect when an emissions boundary has been crossed, is more appropriate than a tax, which requires a precise quantification of emissions to be levied fairly and effectively.

The literature in this section compares (contrasts) regulation and taxation in the context of GHG emissions.