Systems for refunding emissions payments

We analyze two mechanism designs for refunding emission payments to polluting firms: output-based refunding (OB) and expenditure-based refunding (EB). In both instruments, emission fees are returned to the polluting industry, typically making the policy more politically acceptable than a standard tax. The crucial difference between OB and EB is that the fees are refunded in proportion to output in the former but in proportion to the firms’ expenditure on abatement equipment in the latter. To achieve a given abatement target, the fee level in the OB design exceeds the standard tax rate, whereas the fee level in the EB design is lower. The paper “Refunding Emissions Payments” has been submitted to an international journal and has been invited to a resubmission.