Taxes versus emissions trading system: evaluating environmental policies that affect multiple types of pollution

Abstract

This paper examines the interaction of different policies used to control two types of agricultural pollution. Pollution control policy is efficient when both pollution types are controlled by taxes, although a tax increase on one type of pollution can increase the quantity of another type of pollution if farm inputs are substitutes. However, if one of the pollutions is controlled by a local emissions trading scheme, and another pollution type is taxed, then the pollution type which is taxed becomes less responsive to a change in its own tax levels. This policy scenario results in inefficient levels of environmental pollution outcomes unless the cap for the local emissions trading scheme is constantly being shifted in response to the tax.