Research

Working Papers

Pigou vs Equity: Optimal Corrective Tax & Rebate Rules | single authored (available upon request)

Abstract: Carbon pricing has become a core element of climate policy. However, recently, equity concerns have been raised due to the regressive outcomes of climate policies and ensuing acceptance problems. This paper investigates how equity concerns can be addressed in conjunction with a Pigouvian intervention. I apply methods from the theory of optimal taxation to a setting with heterogeneous agents and multiple "dirty" goods. Linear tax and rebate rules are derived, suggesting that Pigouvian taxes under a slack planner budget follow an elasticity rule. This reflects a novel second-best logic of optimal corrective taxes: they distort more where they produce a stronger reduction in external effects. I further show that a slack planner budget is only optimal under knife-edge conditions. If these are not fulfilled, taxes also follow the well-known inverse elasticity rule and consist of a redistributive Ramsey term and an additive Pigouvian term.  The distortionary and redistributive terms of the additive Pigouvian term cancel out, which explains the occurrence of the first-best Pigouvian tax in second-best tax formulas. I conclude that Pigouvian taxes should never be used to address equity concerns if the rest of the tax system is optimally calibrated to address distortions and redistribution. However, the results suggest that, if aligned with redistributive goals, differentiation of the Ramsey term is justified by using preferences as a screening device for the externality intensity of consumption. 

Emissions Trading with Supply Adjustment Mechanisms and Market Power | with Simon Quemin and Niklas Schoch

Abstract: Endogenous supply adjustment mechanisms have become a typical feature in permit markets, but their designs differ across markets. We show that incentives for regulated agents who hold market power are contingent on the key policy design choice of the market observable used to condition supply adjustments. Specifically, we develop a stylized dynamic model of a permit market with endogenous supply adjustments and increasing stringency over time, where a subset of agents holds market power. This allows us to draw distinctions between the two main approaches implemented in permit markets today, i.e., quantity-and price-based adjustment mechanisms. Quantity-based adjustments tend to exacerbate potential price distortions from market power. In contrast, price-based adjustments can mitigate them if implemented correctly while remaining active at later market stages. As market power concerns may become increasingly salient as permit market sizes decrease in line with net-zero targets, our results inform the ongoing debate about the design of supply adjustment mechanisms.