Tax-Versus-Trading and Free Emission Shares as Issues for Climate Policy Design
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We give empirical welfare results for global greenhouse gas emission control, using the first multiparty
model to combine tax-versus-trading under uncertainties with revenue recycling. Including
multiple 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 tax has a different, much bigger advantage, from better
handling uncertainties in business-as-usual emissions. Either mechanism's free emissions share,
from tax thresholds or free permits, which lowers its possible welfare gain from revenue recycling,
may however dominate any tax-versus-trading advantage. Moreover, political and practical
constraints, such as the political unacceptability of no free emissions, the institutional unavailability
of efficient emissions tax thresholds, and the unpopularity of recycling revenue as conventional tax
cuts, make ideal welfare maximisation a poor guide for mechanism choice; and at optimal prices,
trading currently tends to outperform taxation.