Working Paper: CEPR ID: DP6209
Authors: Thierry Brechet; Susana Peralta
Abstract: International markets for tradable emission permits (TEP) co-exist with national energy taxation. A firm trading emission permits in the international market also pays energy taxes in its host country, thus creating an interaction between the international TEP-market and national energy taxes. In this paper we model that interaction in a framework of a perfectly competitive international TEP-market, where heterogeneous firms trade their TEP endowments. National governments set energy taxes non-cooperatively so as to maximize fiscal revenue from energy and profit taxes. We identify the driving forces behind Nash equilibrium taxes. We show how they depend on the total amount of TEPs in the market, on firms' TEP-endowment and on the number of participating countries. We also show how energy taxation varies with the introduction of the market on a previously unregulated world. Finally, we highlight the fact that the TEP-market does not achieve abatement cost efficiency, despite its being perfectly competitive.
Keywords: fiscal competition; Kyoto Protocol; tradable permits
JEL Codes: H23; H73; Q48; Q52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher energy consumption (Q41) | national energy taxes (Q58) |
| introduction of TEP market (F16) | national energy taxation (Q58) |
| TEP market (F16) | cost efficiency (D61) |
| national energy taxes (Q58) | fiscal externalities (H39) |
| national energy taxes (Q58) | pecuniary externalities (D62) |
| TEP market (F16) | varying abatement costs (Q52) |
| national energy taxation (Q58) | strategic interactions among countries (F55) |
| national energy taxes (Q58) | TEP price (F16) |