Taxes, Permits and Costly Policy Response to Technological Change

Abstract

In this paper we analyze the e ects of the choice of price (taxes) versus quantity (tradable permits) instruments on the policy response to technological change. We show that if policy responses incur transactional and political adjustment costs, environmental targets are less likely to be adjusted under tradable per- mits than under emission taxes. This implies that the total level of abatement over time might remain unchanged under tradable permits while it will increase under emission taxes.