Taxes Versus Quantities Reassessed

62 Pages Posted: 21 Feb 2019

See all articles by Larry S. Karp

Larry S. Karp

University of California, Berkeley

Christian P. Traeger

University of Oslo - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

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

Karp, Larry S. and Traeger, Christian P., Taxes Versus Quantities Reassessed (2018). CESifo Working Paper No. 7331, Available at SSRN: https://ssrn.com/abstract=3338660 or http://dx.doi.org/10.2139/ssrn.3338660

Larry S. Karp (Contact Author)

University of California, Berkeley ( email )

Dept. of Agriculture & Resource Economics
313 Giannini Hall
Berkeley, CA 94720
United States
510-643-8911 (Fax)

Christian P. Traeger

University of Oslo - Department of Economics ( email )

Norway

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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