Economic Instruments and the Kyoto Protocol: Environmental Taxes versus Tradable Pollution Permits.

The Kyoto Protocol was accepted by the European Commission in April 2002, laying down a distribution system of emission reduction efforts among the member countries in order to reach the objective of 8 % for the entire EU. Among the measures adopted by the EU for the fulfilment of the Protocol, there is a Directive (2003/87/CE) establishing a scheme for carbon dioxide emission allowance trading within the Community. The sphere of application to the market is limited, so only certain sectors will be regulated by this measure. This fact has important consequences in terms of efficiency costs and distributional effects among sectors. In this paper, we use a static general equilibrium model to assess the effects of this new environmental policy in Spain. The paper also compares the restricted market with broader instruments by including all sectors. The results obtained show that the costs of reaching the objects set by the EU for Spain are of little significance. We show also the efficiency costs raised by the narrow nature of the European market. Finally it corroborates the fears expressed by industrial sectors against carbon taxes as they raise revenues whatever is the level of emissions