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The Relative Efficiency of Market-based Environmental Policy Instruments with Imperfect Compliance

Author

Listed:
  • Sandra Rousseau

    (K.U.Leuven-Center for Economic Studies)

  • Stef Proost

    (K.U.Leuven-Center for Economic Studies - CORE, UCL, Belgium)

Abstract
This paper examines to what extent incomplete compliance of environmental regulation mitigates the distortions caused by pre-existing labour taxes. We study the relative cost efficiency of three market-based instruments: emission taxes, tradable permits and output taxes. In a first-best setting and given that monitoring and enforcement is costless, we find that the same utility levels can be reached with and without incomplete compliance. However, allowing for violations makes the policy instruments less effective. The nominal tax rate needs to be higher or the number of permits issued smaller, in order to obtain the required emission reduction. Including monitoring and enforcement aspects, and more specifically fines, into the model in a second-best setting, provides us with a new means of collecting tax revenues and of lessening existing tax distortions. We show that the relative position of grandfathered tradable permits vis-à-vis emission taxes improves considerably when allowing for incomplete compliance in a second-best setting

Suggested Citation

  • Sandra Rousseau & Stef Proost, 2004. "The Relative Efficiency of Market-based Environmental Policy Instruments with Imperfect Compliance," Energy, Transport and Environment Working Papers Series ete0415, KU Leuven, Department of Economics - Research Group Energy, Transport and Environment.
    • Handle: RePEc:ete:etewps:ete0415
    as

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    File URL: https://lirias.kuleuven.be/bitstream/123456789/120205/1/ETE-WP-2004-15.pdf
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    References listed on IDEAS

    as
    1. Montero, Juan-Pablo, 2002. "Prices versus quantities with incomplete enforcement," Journal of Public Economics, Elsevier, vol. 85(3), pages 435-454, September.
    2. Harford, Jon D., 1978. "Firm behavior under imperfectly enforceable pollution standards and taxes," Journal of Environmental Economics and Management, Elsevier, vol. 5(1), pages 26-43, March.
    3. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
    4. Mayeres, Inge & Proost, Stef, 2001. "Marginal tax reform, externalities and income distribution," Journal of Public Economics, Elsevier, vol. 79(2), pages 343-363, February.
    5. Sandra Rousseau & Stef Proost, 2005. "Comparing Environmental Policy Instruments in the Presence of Imperfect Compliance – A Case Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(3), pages 337-365, November.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Florian Baumann & Tim Friehe, 2017. "Design standards and technology adoption: welfare effects of increasing environmental fines when the number of firms is endogenous," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 19(2), pages 427-450, April.
    2. Sandra Rousseau & Stef Proost, 2005. "Comparing Environmental Policy Instruments in the Presence of Imperfect Compliance – A Case Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(3), pages 337-365, November.

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    More about this item

    Keywords

    Environmental policy; instrument choice; monitoring and enforcement;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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