Tradeable Emissions Permits, Emissions Taxes and Growth

Abstract

This paper uses a dynamic general equilibrium model with overlapping generations in order to analyse and to compare emissions taxes and tradeable emissions permits. Even in the context of a perfect environment, i.e. with perfect information, perfect competition…, it is shown that privately owned emissions permits have some disadvantages. An equilibrium with emissions permits would certainly be better than a laissez-faire equilibrium since it would entail a lower pollution level. However, it is far from clear that an economy with pollution permits would be preferable over an economy with emissions taxes. While in both cases pollution would be lower, growth would be higher in an economy with emissions taxes. This is because emissions permits divert saving from 'productive' resources and have a negative impact on capital accumulation. This happens whatever the way emissions taxes are redistributed. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2004.