Refunding Emission Payments: Output-Based Versus Expenditure-Based Refunding
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Refunding Emission Payments: Output‑Based Versus Expenditure‑Based Refunding Cathrine Hagem1 · Michael Hoel2 · Thomas Sterner3 Accepted: 16 September 2020 / Published online: 25 September 2020 © The Author(s) 2020
Abstract We analyse two mechanism designs for refunding emission payments to polluting firms: output-based refunding (OBR) and expenditure-based refunding (EBR). In both instruments, emission fees are returned to the polluting industry, typically making the policy more politically acceptable than a standard tax. The crucial difference between OBR and EBR is that the fees are refunded in proportion to output in the former but in proportion to the firms’ expenditure on abatement technology equipment in the latter. To achieve the same abatement target as a standard tax, the fee level in the OBR design is higher, whereas the fee level in the EBR design is lower. The use of OBR and EBR may lead to large differences in the distribution of output and costs across firms. Both designs imply a cost-ineffective provision of abatement, as firms put relatively too much effort into reducing emissions through abatement technology compared with reducing output. However, a standard tax may be politically infeasible and maintaining output may be seen as a political advantage by policymakers if they seek to avoid activity reduction in the regulated sector. Keywords Refunded charge · Output-based · Expenditure-based · NOx · Tax subsidy · Policy design JEL Classification Q28 · Q25 · H23
1 Introduction It is well known that a uniform tax, levied on all sources of emissions, is a cost-effective instrument to reduce uniformly dispersed emissions. An ideal such tax is referred to as a Pigouvian tax. However, environmental taxes in practice tend to be lower than required to correct for environmental externalities. One reason is that high taxes reduce domestic competitiveness, leading to firm closures and job losses. Furthermore, for transboundary * Cathrine Hagem [email protected] 1
Research Department, Statistics Norway, PO Box 2633, St. Hanshaugen, 0131 Oslo, Norway
2
Department of Economics, University of Oslo, PO Box 1095, Blindern, 0317 Oslo, Norway
3
Department of Economics, University of Gothenburg, PO Box 640, 405 30 Gothenburg, Sweden
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pollutants, such as greenhouse gases, the welfare effect of reduced domestic emissions may be partly offset by increased production and emissions abroad (carbon leakage), see Hoel (1991). Moreover, powerful lobbies may overstate these and other arguments and thus make a cost-effective tax regime politically infeasible. All in all, the inability to levy sufficiently high environmental taxes is a problem for the design of environmental policy. Currently we see many proposals for “fee and dividend” schemes through which climate taxes would be returned as checks to the population to make them politically more palatable.1 Our study concerns something slightly different since we look at refunding to industrial emitters but some of the lessons lea
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