Taxes, Permits, and the Adoption of Abatement Technology under Imperfect Compliance
"This paper analyzes the effects of the choice between price-based and quantity-based emissions regulations on compliance incentives and social welfare in the presence of incomplete enforcement and technology adoption. We show that if the regulator does not adjust the level of the policies in response to the advent of the new technology, the extent of violations under tradable emissions permits (TEPs)— in contrast to taxes—decreases with the rate of technology adoption. However, in terms of welfare, the ranking of the instruments is not so straightforward: taxes may induce lower emissions damages, while TEPs induce lower abatement, investment, and expected enforcement costs. Therefore, the overall ranking depends on the extent to which these effects offset each other."