Economic effects of national emissions trading schemes; national dilemma’s within a global issue

This paper investigates the effects of the various systems of tradeable allowances for CO2-emissions in the Netherlands. These effects are compared with those of raising and adapting the current energy taxes. The results show that a hybrid emissions system (with a absolute cap for sheltered sectors and a relative cap for exposed sectors) performs best in terms of a net national income measure of welfare. An emissions reduction of 12 Mton in 2010 results in carbon price of 95 Euro per ton carbon dioxide and 0.3% loss of Net National Income (NNI). A uniform emission ceiling yields a lower CO2price (45 Euro/ton), but also a lower national income (-1.1%), due to the relocation of energy-intensive exposed sectors across the border. Increasing energy taxes within the current tax system is also less efficient (-0.7% NNI), due to the inferior design. From an economic point of view, a national hybrid system of CO2-trading is an expensive policy instrument, due to the high transaction costs of the performance benchmark and the distinction between sheltered and exposed sectors. The first-best option therefore is to impose CO2-emission trading on an international level. Such a scheme will result in a lower allowances price and less loss of national income. In the national context improving the energy tax design seems to be the most efficient implementation of the domestic climate policy. The current energy tax system can be improved by extending it to all energy use in combination with the current energy efficience covenants and by introducing carbon dioxide differentiation.