Why a national cap-and-trade policy with a carve-out provision may be preferable to a national CO2 tax

Why a national cap-and-trade policy with a carve-out provision may be preferable to a national CO2 tax / Megan H. Accordino and Deepak Rajagopal. Berkeley : UC Center for Energy and Environmental Economics, Aug. 2013, 41 p.(UCE3  Working Paper Series ; E3 WP-063)


Authors’s abstract :

That a global externality such as climate change is best dealt with through global agreements and, by extension, that a national agreement is preferable to more localized policies is well-known. This paper seeks to understand what type of national policy is most cost-effective when states may prefer to adopt or retain relatively more stringent policies. We analyze different pairs from a set of four policy instruments – a CO2 tax, a cap-and-trade, a clean energy standard and a renewable portfolio standard (RPS), and consider each policy with and without a carve-out provision. We find that when the national policy applies evenly to all states, states that are small relative to their market can affect national emissions only by adopting an RPS policy regardless of the type of national policy. However, when the national policy is a quantity-based emissions policy that allows states to be carved out of the national policy, states of all sizes can affect national emissions with state-level emissions policies. Furthermore, when a state enacts an emissions policy under a national quantity-based emissions policy with a carve-out provision, the state’s policy puts pressure on both the state and the rest of the nation to further reduce emissions. As a result, we find that the national policy that appears to be the least cost way to accommodate policies by individual states of any size is a cap-and-trade policy with a carve-out provision as opposed to a CO2 tax.

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