Taxing international emissions trading

- We investigate the efficiency and effectiveness consequences of emissions trading taxation.
- Permits taxation distorts the equilibrium price and abatement efforts.
- Change in the equilibrium permits price brought about by taxation can be significant.
- Policy design based on cost effectiveness might lead to inefficient tax decisions.

We investigate the efficiency and effectiveness consequences of emissions trading taxation. A theoretical partial equilibrium model is developed, showing that permits taxation distorts the equilibrium price and abatement efforts. Potentially counterintuitive conclusions concerning the tax revenue are also derived. A CGE model complements theoretical results, suggesting that the change in the equilibrium permits price brought about by taxation can be significant. Finally, we conclude that policy design based on cost effectiveness might lead to wrong conclusions: the socially desirable design of emissions trading taxation requires homogenous tax rates applied to net sellers and no rebate rates allowed for net buyers.