According to economists, solving environmental problems is simple. Politicians should simply impose a uniform tax on harmful emissions. However, the actual design of such green taxation shows that politicians do not follow their advice. CO 2 taxation in OECD, for example, is highly differentiated and greatly favours industry. In fact, CO 2 tax rates for industry are, on average, six times lower than those for households. We argue that the reason for this tax differentiation is that industry, in contrast to households, has a strong capability to lobby. Therefore, green taxation is effectively blocked and the desired environmental results are not being achieved. Why then is green taxation persistently applied in relation to industry? We argue that strong fiscal incentives drive this policy choice at the expense of environmental concerns because this allows environmental bureaucracies to maximize budgets.
We investigate the risk of favouring domestic industries in the current European Union Emission Trading System (EU ETS). As the EU forms a weak federal structure compared to the US, there is a risk that single countries may free ride on the others by choosing to take a blind eye to industry-level corruption when tempted to favour their own industries. In other words, the optimal level of national cheating may not take into account the external cost it imposes upon other countries and the risk of wide-scale cheating and the possibility of an EU ETS collapse. Such national incentives to cheat correspond to a well-known transnational externality problem from international environmental problems and multiplayer prisoners' dilemma games. Thus, there is a strong need for systematic empirical analysis of whether cheating actually occurs in the EU ETS as predicted by theory.
Abstract The purpose of this article is to analyse whether the presence of surplus emission allowance trading jeopardizes the environmental target of an international environmental agreement. We argue that surplus emission allowance trading can be used as an implicit side-payment mechanism to actually bring about higher environmental protection compared with the situation without the trade option. We point to the existence of a fundamental trade-off between costs of compliance and the creation of dynamic incentives to develop cheaper reduction technologies. Implicit side payments, in terms of surplus emission allocations, may be needed in order to establish a compromise between these opposing demands. We identify the shortcomings and benefits of allowing fully flexible permit trading, including the allocation rule of grandfathering.
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