Output-Based Refunding of Emission Payments: Theory, Distribution of Costs, and International Experience

In this paper, we discuss the effect of refunding environmental charges. Taxes often are resisted by polluters because they imply both abatement and tax costs. We show that when charges are refunded, the incentives for abatement are essentially the same as for a tax, but the output reduction that often accompanies a tax scheme is forgone. We describe and examine the refund emissions payment (REP) scheme as a policy instrument for emissions abatement and compare it with taxes and permits with regard to allocative properties, distribution of costs, property rights, and, consequently, the politics of implementation. As an empirical example, the Swedish charge on nitrogen oxides is analyzed.