Taxing Cap and Trade Environmental Regulation

Abstract

This paper examines the extent to which income taxation interferes with cap-and-trade environmental regulation, and reaches two conclusions. First, within a single tax period, imposing an income tax will not undermine the cost-effectiveness of cap-and-trade regulation. Second, taxes may distort cost-effective allocation of permits and abatement through time when the permit market is dominated by firms owning permits with a tax basis of zero.

Keywords: cap and trade regulation, tax law, tax policy, envioronmental policy

JEL Classification: K23, K32, K34, Q28