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

(Phys.org)—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.


Explore further

Study backs Australia pollution tax plans

Provided by Rice University
Citation: Taxation more effective than emissions trading in reducing pollution, encouraging cleaner energy, study finds (2012, November 2) retrieved 20 June 2019 from https://phys.org/news/2012-11-taxation-effective-emissions-pollution-cleaner.html
This document is subject to copyright. Apart from any fair dealing for the purpose of private study or research, no part may be reproduced without the written permission. The content is provided for information purposes only.
0 shares

Feedback to editors

User comments

Nov 03, 2012
What a discovery !!

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

"economists" ...

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.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more