INTRODUCTION

The atmospheric concentration of greenhouse gases, particularly of carbon dioxide, has been increasing since the Industrial Revolution, and this has been occurring at an accelerated rate in the last three decades. As described in detail in the Introduction, it is estimated that, if the emission of carbon dioxide and other greenhouse gases and the disruption of tropical rain forests were to continue at the present pace, global average air surface temperature toward the end of the twenty-first century would be 3–6°C higher than the level prevailing before the Industrial Revolution, resulting in drastic changes in climatic conditions and accompanying disruption of the biological and ecological environments. In view of the significant impacts such climatic changes would exert upon human life, a large number of policy measures and institutional arrangements have been proposed to stabilize atmospheric concentrations of greenhouse gases effectively.

Among them, the institutional arrangements of carbon taxes and markets for tradable emission permits have attracted widespread attention – particularly among economists such as Ingham, Maw, and Ulph (1974), Baumol and Oates (1988), Grubb and Sibenius (1992), Whally and Wigle (1991), Hoel (1991, 1992), Pearce (1991), and Rose and Stevens (1993).Theoretical analyses have been developed, for example, by Bergstrom, Blume, and Varian (1986), Copeland and Taylor (1986, 1995), Poterba (1991), and Uzawa (1991, 1992a, 1993, 1995) of carbon taxes and by Tietenberg (1985, 1992), Barrett (1990), Grubb (1990), Barrett et al.(1992), Bertram (1992), and Larsen and Shah (1992, 1994) of tradable emission permits.

In this chapter and Chapters 2 and 3, we address the theoretical analysis of implications for an allocative mechanism of carbon taxes and the market for tradable emission permits.