Taxes Versus Quantities Reassessed
62 Pages Posted: 21 Feb 2019
Date Written: 2018
Abstract
The ongoing debate concerning the ranking of taxes versus cap and trade for climate policy
begins with Weitzman’s (1974) seminal slope-based criterion and concludes that taxes dominate
quotas. We challenge this conclusion and the intuition behind it. Because technology shocks and
pollution stocks are both persistent, a technology shock alters the intercepts of both the marginal
damage and abatement cost curves. The ratio of these two intercept shifts is as important as the
ratio of slopes in ranking policies. Technology innovations diffuse gradually, strengthening the
importance of the ratio of intercept shifts. For plausible parameter combinations, quotas can
dominate taxes.
Keywords: policy instruments, pollution, climate change, taxes, quantities, regulation, uncertainty, cap and trade, technology
JEL Classification: Q000, Q500, H200, D800
Suggested Citation: Suggested Citation