Taxation and Multi-period Global Cap and Trade by Mitchell Kane, Professor of Law, NYU School of Law, has been published in the New York University Environmental Law Journal (19 NYU Env.L.J. 87 (2011)). A brief abstract is below:
This paper analyzes the ways in which taxation can distort prices in greenhouse gas emissions permit markets that encompass multiple periods and multiple jurisdictions. The paper first distinguishes between two broad ways in which the tax system intersects with permit markets. The first relates to the optimal provision of public goods and encompasses the set of questions typically dealt with under the analysis of a potential “double dividend” from environmental taxes. The second relates to abatement efficiency and involves the removal of tax induced distortions to otherwise efficient incentives for firms to abate emissions at least cost. The paper then describes two ways in which a tax system can seek to address abatement efficiency. The tax system can attempt to equalize tax treatment of actual abatement across firms and the tax treatment of permits across firms (inter-firm neutrality). Or, the system can attempt to equalize the tax treatment of actual abatement and permits within each firm (intra-firm neutrality). The paper describes the requisite conditions for these two neutrality approaches and the predicted effects on permit prices. It also demonstrates that in a multi-period regime one can expect to observe both premia to banking permits (the typical lock-in problem described in the literature) as well as penalties to banking permits. Moreover, only the norm of inter-firm neutrality can adequately address both banking premia and banking penalties. The paper also shows that the preferred approach to neutrality is likely to evolve with the geographic expansion of the market. Inter-firm neutrality is the preferred approach in a national market because of its superior ability to deal with inter-temporal distortions; intra-firm neutrality is the preferred approach in the multi-jurisdictional context because of the relative ease of coordinating tax treatment within firms as opposed to across firms. Finally, the paper applies the relevant neutrality norms to two crucial tax policy questions that arise under permit markets: the appropriate treatment of permits allocated gratis and the appropriate sourcing of abatement and permit costs.