Taxation more effective than emissions trading in reducing pollution, encouraging cleaner energy, study finds

November 2, 2012 by Amy Hodges, Rice University

(—Rice University economics professor Ted Temzelides and University of Bern economics professor Cyril Monnet used game theoretic modeling to examine alternative mechanisms for reducing emissions in Europe, including the European Union emissions trading system (EU ETS) and taxation.

ETS, also known as cap-and-trade, is a market-based approach used to control by providing market incentives for achieving reductions in the emissions of pollutants. This approach was compared with a flat tax assessed to corporations on the basis of their environmental emissions.

The researchers' findings revealed that while both ETS and taxation can work well in reducing emissions, ETS can lead to volatile prices and speculative trading, which makes it hard for firms to evaluate the costs and benefits of adopting new and cleaner technologies.

"Taxes and permits can work equally well in many cases," Temzelides said. "However, if we take into consideration and creating incentives for adopting cleaner technologies, firms can plan better knowing what the tax is going to be instead of anticipating volatile prices."

Although Temzelides admitted "tax is not a likable word," he said that companies can't plan well when prices are volatile. "An emissions tax allows firms to plan better and can result in reduced emissions as a result of adopting newer technologies," he said.

Temzelides said he hopes that future discussion of ways to reduce pollution in the U.S. will involve taxation rather than emission trading for the areas that will choose to regulate emissions.

"The EU experience with ETS has not been a great success so far," he said. "We can avoid repeating the same mistakes by considering a range of options in reducing emissions."

The study, "Monetary Mechanisms," was funded by Rice University and the University of Bern.

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5 / 5 (1) Nov 03, 2012
What a discovery !!

And add to that : taxation much cheaper to operate (much less overhead)

"economists" ...
3 / 5 (2) Nov 03, 2012
It was Libertarian and Conservative Economists who insisted that emission's trading was the optimal way to reduce CO2 emissions in the first place.

Simple taxation they insisted didn't give corporations the flexibility to raise or lower their emissions rapidly enough, so they concocted the idea of a "free market" trading scheme where companies could trade with each other for the rights to emit CO2.

It is a Conservative Solution to an Ecological problem, that Conservative Economists then labeled as "liberal" and began to oppose.

Stupid is as Conservatives do.
3 / 5 (2) Nov 04, 2012
The conclusion (tax more effective than a trading scheme) is simply obvious, as I've been saying for years. Corporate planners, when deciding to approve an investment required to reduce their emissions, must use the LOWEST estimate of the likely future price of the emissions trades in their calculations, whereas with a tax they use the exact future price. Therefore, per dollar cost to the corporation of fees extracted to discourage pollution, a trading system has less effect per dollar than a tax.

Anyone who's worked in a boardroom or had to make presentations to boards to get budgets for capital projects, of a medium to large corporation already knows this.

Cap-and-Trade is simply a(nother) way that traders and brokers are trying to extract money as trading fees for themselves, not caring that it will be less efficient that a simple tax.

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