Incentive mechanisms for environmental protection under asymmetric information: a case study

Abstract

The purpose of this paper is to compare the performance of some instruments of environmental policy, using data for a coal-fired power plant. Each decentralized scheme coverages towards the social optimum, chosen by a regulator. We look at the performance of a changing tax rate on emission, of an announcement of the tax formula, of an announcement of the tax formula with a tax refund possibility, and of a tax-cum subsidy scheme. Our emphasis is on full information concerning the tax and subsidy formulas and on the opportunity for the firm to optimize intertemporally. We also test two performance schemes which combine social optimal pricing with optimal abatement decisions. Our interest is to compare the speed of convergence of the schemes, the monetary side payments (subsidy, bonus) required, and to look for self-financing schemes.