Taxes

1. Taxes Permits t* P* MC MC M* L*(= M*) M M PH t* P* MCH MCH PL MC MC MCL MCL ML M* M MH M L*(= M*) Figure 8.1 A comparison of emissions taxes and marketable emissions permits when abatement costs are uncertain.

2. Figure 8.2 Target setting under perfect information. MD t* MC M* Emissions, M

3. Figure 8.3 Uncertainty about abatement costs – costs overestimated. MD Loss when licenses used tH t* MC (assumed) Loss when taxes used MC (true) Mt M* LH Emissions, M

4. Figure 8.4 Uncertainty about abatement costs – costs underestimated. MD t* tL MC (true) MC (assumed) LL M* Mt Emissions, M

5. Figure 8.5 Uncertainty about abatement costs – costs overestimated. MD MD tH t* MC (assumed) MC (true) Mt M* LH Emissions, M

6. Figure 8.6 Uncertainty about abatement costs – costs underestimated. MD MD t* tL MC (true) MC (assumed) M* LL Mt Emissions, M

7. Figure 8.7 Uncertainty about damage costs – damages underestimated. MD (true) MD (estimated) t MC (true) M* L Emissions, M

8. Figure 8.8 Consequences of a threshold in the damages function. Total damages D M Emissions, M

9. Figure 8.8 (Panel (b)) Marginal damages & marginal (abatement) costs MD t2 MC1 t1 MC2 M M22 M1 M2 Emissions, M

10. Figure 8.9(a) Incentive effects with permit systems. MD P1 * MC (reported) P2 MC (true) M* =L* MP =LP Emissions, M

11. Figure 8.9(b) Incentive effects with an emissions tax. MD * T MC (true) MC (reported) MT1 MT2 M* Emissions, M

12. Figure 8.10(a) An incentive compatible instrument and under-reporting costs. MD P* MC (true) MC (reported) M*= L* Emissions, M

13. Figure 8.10(b) An incentive compatible instrument and over-reporting costs. MD MC (reported) P* MC (true) M* Emissions, M

14. Figure 8.11 The net benefits of regulation. Marginal real resource cost of abatement + induced indirect costs + transactions costs Marginal real resource cost of abatement + induced indirect costs D Marginal real resource cost of abatement C Gross marginal benefits of abatement B A ZB ZA ZC Emissions abatement