Tax policy beats permits for cleaner environment and higher welfare!
The study compares tradable permits and emission tax regulations for environmental policies with a consumer-friendly firm. When the government can commit to a policy, both methods have similar outcomes. However, without commitment, firms adjust their behavior differently. Under permits, firms emit less to get higher quotas, while under tax, they emit more to lower the tax rate. Overall, tax policies lead to higher welfare and less environmental damage unless consumer surplus is a big concern.