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Title: The Race for Polluting Permits

Author(s): Thierry Brechet and Susana Peralta

Publication Date: March 2007

Keyword(s): fiscal competition, Kyoto protocol and tradable permits

Programme Area(s): Public Economics

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.

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Bibliographic Reference

Brechet, T and Peralta, S. 2007. 'The Race for Polluting Permits'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6209