This article argues that a pollution tax works much better with other programs than emissions trading. A pollution tax provides an added impetus for pollution sources to accept complementary regulation. Pollution sources carrying out other requirements to reduce emissions end up reducing their tax bill and further enhancing environmental quality. Furthermore, because every ton of pollution remains subject to a tax, polluters acquire an incentive to consider going further than required when a more specific reduction requirement applies to them.
By contrast, a trading program systematically undermines supplemental measures. Additional programs do not usually generate extra emission reductions, as any additional pollution reductions arising from a supplemental program will usually generate credits that can be sold to polluters as a substitute for their local compliance with the trading program. As a result, a new program working together with trading often raises compliance cost and limits flexibility without necessarily adding environmental benefits. For these reasons, emissions trading tends to retard the development of robust multi-faceted approaches to environmental problems.
This paper asks whether a pollution tax’s superiority in “playing nice with other instruments” constitutes an important advantage, and concludes that for a complex long-term problem like global climate disruption, it does. Indeed, this paper shows that this ability to play nice with other instruments, at least in some contexts, matters a great deal more than the efficiency and simplicity arguments that scholars have conventionally focused on in debating instrument choice.
This paper uses law and economics theoretical analysis as its methodology, which involves evaluation of competing analytical and normative claims. It does rely on empirical cases with respect to political economy questions. While this is not an economic modeling study, it draws on germane economic modeling studies in the literature.