Working Paper: CEPR ID: DP17546
Authors: David Hemous; Steve Cicala; Morten Olsen
Abstract: This paper applies principles of adverse selection to overcome obstacles that prevent the implementation of Pigouvian policies to internalize externalities. Focusing on negative externalities from production (such as pollution), we consider settings in which aggregate emissions are known, but individual contributions are unobserved by the government. We evaluate a policy that gives firms the option to pay a tax on their voluntarily and verifiably disclosed emissions, or pay an output tax based on the average rate of emissions among the undisclosed firms. The certification of relatively clean firms raises the output-based tax, setting off a process of unraveling in favor of disclosure. We derive sufficient statistics formulas to calculate the welfare of such a program relative to mandatory output or emissions taxes. We find that the voluntary certification mechanism would deliver significant gains over output-based taxation in two empirical applications: methane emissions from oil and gas fields, and carbon emissions from imported steel.
Keywords: Trade; Climate Change; Mechanism Design; Environmental Policy
JEL Codes: D82; H2; H87; K32; L51; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Voluntary emissions certification mechanism (Q58) | Increase in output-based tax for non-certified firms (H32) |
| Increase in output-based tax for non-certified firms (H32) | Incentivizes more firms to disclose their emissions (Q52) |
| Voluntary emissions certification mechanism (Q58) | Reduction in emissions by up to 80% (Q52) |
| Output tax (H29) | Reduction in emissions by about 4% (H23) |
| Voluntary emissions certification mechanism (Q58) | Welfare gains of approximately $12 billion per vintage of wells drilled (D69) |