The authors analyze how price-based and quantity-based emissions regulations affect compliance incentives and social welfare with incomplete enforcement and technology adoption.
If the policy level is not adjusted in response to new technology, violations under tradable emissions permits (TEPs)—in contrast to taxes—decrease with the rate of technology adoption. Regarding welfare, ranking the instruments is not so straightforward: taxes may induce lower emissions damages, while TEPs induce lower costs of abatement, investment, and expected enforcement. The overall ranking depends on the extent to which these effects offset each other.
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