July 27, 2008

Bankruptcy Risk and Imperfectly Enforced Emissions Taxes.

by John K. Stranlund and Wei Zhang

- Under favorable but reasonable conditions, an imperfectly enforced emissions tax produces the efficient allocation of individual emissions control; aggregate emissions are independent of whether enforcement of the tax is sufficient to induce the full compliance of firms, and differences in individual violations are independent of firm-level differences. All of these desirable characteristics disappear when some firms under an emissions tax risk bankruptcy: the allocation of emissions control is inefficient, imperfect enforcement causes higher aggregate emissions, and financially insecure firms choose higher violations.

Stranlund, J.K. and W. Zhang (2008). "Bankruptcy Risk and Imperfectly Enforced Emissions Taxes." University of Massachusetts Amherst Department of Resource Economics Working Paper No. 2008-3, Jul 2008.