Are all market-based environmental regulations equal?
Economists have long advocated using the market to achieve environmental objectives. Possible policies include taxes on waste emissions and programs through which the government limits pollution by issuing emission permits that can be traded among companies. Unlike “command and control” regulations that specify which technology companies must use, market approaches such as these allow companies flexibility to choose their own ways to reduce pollution at lowest cost. But which market-based instruments are best? Research suggests that the economic costs of tradable permits can be much larger than those of emissions taxes if the permits are given out free or grandfathered to firms. Emissions taxes provide revenues that can be recycled in tax reductions that increase employment. In addition, tradable permits can result in disproportionately high costs for the poor, whereas the revenues from emissions taxes can be converted into tax cuts that help the poor. Policymakers are currently debati
