EU-type carbon emissions trade and the distributional impact of overlapping emissions taxes

The European Union fulfills its emissions reductions commitments by means of an emissions trading scheme covering some part of each member state’s economy and by national emissions control in the rest of their economies. The member states also levy energy/emissions taxes overlapping with the trading scheme. We investigate the impact of that double regulation on the distribution of national welfares. In certain very special cases emissions tax increases turn out to be exactly offset by permit price reductions such that permit-exporting [permit-importing] countries lose [gain] from an increase in the overlapping emissions tax. These results are not general due to market-interdependence effects, which may even reverse the sign of welfare changes. For that ambiguity and other reasons the case is made for abolishing overlapping taxes.

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