Question

In: Economics

McKibbin and Wilcoxen (2002) provide a detailed analysis of the policy design challenges that attend choosing...

McKibbin and Wilcoxen (2002) provide a detailed analysis of the policy design challenges that attend choosing between a carbon tax and an emission trading scheme (ETS). The textbook answer suggest that both will be efficient. However, the tax effectively sets price and the policy maker might need to iteratively adjust the tax to impact on the quantity of pollution. In contrast, an ETS sets the quantity of pollution and allows the market for permits to establish a price. Read the article by McKibbin and Wilcoxen carefully, especially pages 116-122. Explain the benefits of a tax versus an ETS and vice versa and the role of uncertainty. Why do the authors settle on a hybrid policy choice? (Maximum word limit 350 words)

Solutions

Expert Solution

The key issue here is the relative slope of the benefit and cost curves associated with abatement. In simple terms, if the benefit curve is steep and the cost curve flat, then an ETS will be favoured. The logic here is that a tax (which you will recall adjusts the price but not directly the quantity) set too low will not impact on emissions at all and if set high will force emissions close to zero, even though the benefits don’t justify it. If the benefit curve is flat and the cost curve steep then a tax is preferable to an ETS.

Recall that an ETS sets the quantity rather than price (the latter determined by the demand for permits). Thus, when the marginal cost of abatement is uncertain the capping of emissions (via an ETS) can give rise to very large prices for permits; much higher than any additional benefits. McKibbin and Wilcoxen (2002) argue that given the evidence on greenhouse gases, a tax is likely to be preferable to an ETS, That said, a carbon tax has significant political liabilities (ask the former Labor government).

The significant transfers from firms to government also give rise to substantial distributional challenges. The notion of a hybrid policy involves long-term tradable permits (as per an ETS) and some shortterm (i.e. annual) permits; the latter effectively acting as a tax. The idea of a hybrid system is that it avoids the disadvantages of the tax and ETS systems under conditions of uncertainty


Related Solutions

McKibbin and Wilcoxen (2002) provide a detailed analysis of the policy design challenges that attend choosing...
McKibbin and Wilcoxen (2002) provide a detailed analysis of the policy design challenges that attend choosing between a carbon tax and an emission trading scheme (ETS). The textbook answer suggest that both will be efficient. However, the tax effectively sets price and the policy maker might need to iteratively adjust the tax to impact on the quantity of pollution. In contrast, an ETS sets the quantity of pollution and allows the market for permits to establish a price. Read the...
Provide an example of dissemination of evidence that influenced health policy. Provide a detailed analysis of...
Provide an example of dissemination of evidence that influenced health policy. Provide a detailed analysis of the evidence presented and the impact to our public health system.
Provide a detailed analysis of Kant's Critique of Practical reason
Provide a detailed analysis of Kant's Critique of Practical reason
In light of the above case study and relevant theory, provide a detailed analysis on the...
In light of the above case study and relevant theory, provide a detailed analysis on the major steps that you would recommend to DHL for a comprehensive supply chain network design process.
Provide detailed information about the Banking Industry in Bangladesh with examples and in depth analysis with...
Provide detailed information about the Banking Industry in Bangladesh with examples and in depth analysis with charts. - Marks 20
Research and describe the six rights of the consumer. Provide a detailed analysis of each right...
Research and describe the six rights of the consumer. Provide a detailed analysis of each right and illustrate the importance. The requirements below must be met for your paper to be accepted and graded: Write between 750 – 1,250 words (approximately 3 – 5 pages) using Microsoft Word in APA style, see example below. Use font size 12 and 1” margins. Include cover page and reference page. At least 80% of your paper must be original content/writing. No more than...
Write a detailed analysis/synthesis about the trade deficit in the U.S. and effects on macro policy.
Write a detailed analysis/synthesis about the trade deficit in the U.S. and effects on macro policy.
Provide cost analysis and decide on the cheapest design concept of a bridge.
Provide cost analysis and decide on the cheapest design concept of a bridge.
Provide a detailed analysis of the current status of private sector job market in Oman. Discuss...
Provide a detailed analysis of the current status of private sector job market in Oman. Discuss the role of private sector in providing employment in Oman (Support your answer by including most relevant and latest available research findings / surveys / publications by government and / or other relevant agencies / organisations / individuals / professional bodies and the like (250-300 words). for 2020 or 2019
Provide a detailed PESTEL analysis of Huawei's CSR strategy in light of the 2018 Huawei sustainability...
Provide a detailed PESTEL analysis of Huawei's CSR strategy in light of the 2018 Huawei sustainability report also explaining the opportunities and threats for Huawei following the UN sustainability goals. Word Count: approx. 1000 words
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT