ABSTRACT
Compared to the issue of carbon abatement costs, the question of policy instruments is relatively uncontroversial. Although more policy-oriented authors argue for a ‘mixed bag’ containing a variety of measures, the economic literature clearly favours the use of market-based instruments like pollution taxes or tradeable emission permits. It does this for the well-known reasons of static and dynamic efficiency (eg Smith, 1992b). Taxes and permits allow the achievement of a given emission target at minimum economic costs (static efficiency), and in addition they create a dynamic incentive for the development of cheaper abatement techniques in the long run (dynamic efficiency). The debate thus soon concentrated on the relative merits of taxes versus permits, and on the question of the most appropriate tax base. Taxes could be levied on the market value of fuels (an ad valorem tax), on their energy content (an energy tax) or on their carbon content (a carbon tax). They could be imposed on the consumer side or on the producer side. Further questions concern the problem of already existing distortions in the energy market, the distributional consequences of a tax, and the use of the collected tax revenues.
