The duality of taxes and tradable permits: A survey with applications in Central and Eastern Europe

Abstract

Economic instruments such as taxes and tradable permits have been promoted as efficiency improving policies in the transition economies of Central and Eastern Europe and elsewhere. The little noticed potential for a symmetric equity impact from the two instruments in a world without distortions is first discussed. A specific policy option is suggested in which existing environmental taxes in Central and Eastern Europe can be increased without imposing additional financial burdens in industry if appropriate tax credits are provided. Second, conditions in Central and Eastern Europe are identified that reduce the change of efficiency losses in a general equilibrium setting when distortions exist. The trade-off between efficiency and equity in such a setting is found to depend on country-specific parameters and to be reduced if: (1) a cost-effective policy is implemented, (2) environmental assets can be distributed prior to privatization, and (3) government expenditures can decline. Copyright © 1999 Cambridge University Press.