Taxing Cap‐and‐Trade Environmental Regulation

This paper examines the extent to which income taxation interferes with cap‐and‐trade environmental regulation and reaches two conclusions. First, within a single tax period, imposing an income tax will not undermine the cost‐effectiveness of cap‐and‐trade regulation. Second, taxes may distort cost‐effective allocation of permits and abatement through time when the permit market is dominated by permit owners with a tax basis of zero.

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