Environmental controls, scarcity rents, and pre-existing distortions

One might suppose that an emissions tax has an advantage over command and c ontrol (CAC) regulations since it raises revenue that can be used to cut ot her distorting taxes. In this paper, we show that the focus on revenue rais ing is misplaced. In a simple analytical general equilibrium model, we show that the same welfare effects of environmental protection can be achieved, by taxes that raise revenue, certain command and control regulations that raise no revenue, and oven subsidies that cost revenue. Instead, the pre-ex isting labor tax distortion is exacerbated by policies that generate privat ely-retained scarcity rents. (C) 2001 Elsevier Science B.V. All rights rese rved.