Tax-versus-trading and efficient revenue recycling as issues for greenhouse gas abatement

Abstract

We give empirical welfare results for global greenhouse gas emission abatement, using the first multi-party model to include both tax-versus-trading under uncertainties, and revenue recycling. Including multiple, independent parties greatly reduces the welfare advantage of an emissions tax over emissions (permit) trading in handling abatement-cost uncertainties, from that shown by existing, single-party literature. But a previously ignored and much bigger advantage of a tax, from better handling uncertainties in business-as-usual emissions, greatly boosts the overall tax-versus-trading advantage. Yet the degree to which each mechanism is used to raise and recycle revenue efficiently by lowering distortionary taxes - rather than recycle revenue as lump sums, or not raise revenue by giving tax thresholds or free permits - may in turn dominate any tax-versus-trading advantage. Choosing the best greenhouse abatement mechanism should thus consider the issues of tax-versus-trading and efficient revenue recycling together.