Taxes and tradable permits differ in that taxes generate revenue for the government from polluting producers, whereas permits may not generate revenue, or may generate less revenue. If the government simply allocates permits initially to all polluters, free of charge, and allows a market to develop, such a process generates no revenue to the government. While economists may advocate an auction of permits in the start-up phase of a tradable permits market, such a mechanism may run into political objections.
Setting taxes at the appropriate level requires knowledge of the cost and damage functions associated with GHGs.
Despite the monitoring costs and the incomplete information that governments typically have about pollution activities, there exist a number of fruitful tools for reducing pollutants and GHGs. Permits and taxes are market based and are efficient when sufficient information is available. In contrast, direct controls may be fruitful in specific instances. In formulating pollution policy it must be kept in mind that governments rarely have every bit of the information they require; pollution policy is no exception.
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