An Endogenous Emissions Cap Produces a Green Paradox

The European Union’s Emissions Trading System (EU ETS) is complemented by a Market Stability Reserve (MSR). After a major revision of the EU ETS in 2018, the MSR effectively makes the supply of allowances responsive to demand. In this paper, we show that a cap-and-trade scheme with an endogenous cap such as the EU ETS produces a Green Paradox. Abatement policies announced early but realized in the future are counter-effective because of the MSR: they increase cumulative emissions. We present the mechanisms in a two-period model, and then provide quantitative evidence of our result for an annual model disciplined on the price rise in the EU ETS that followed the introduction of the MSR. Our results point to the need for better coordination between different policies, such as the ‘European Green Deal’. We conclude with suggestions to improve the workings of an endogenous cap, ahead of the MSR review scheduled for 2021.

Impact of Property Tax Abatement on Employment Growth

Property tax abatement incentives, used by 70% (35 states) of the states in the United States, redirect property tax revenue from the local community to firms in hopes that inducing these firms to relocate will bring economic development benefits to the local community. However, if unsuccessful, property tax abatement incentives might uniquely concentrate the costs of a failed economic incentive strategy within a single community. Using a sample of 45 industries in 43 cities, the authors examined the employment impact of property tax abatement incentives. Property tax abatement incentives were positively associated with employment growth, but only in the early years when the abatement policies were still new. The authors also explored heterogeneity in these results among industries. Property tax abatements targeting service industries, which are less likely to benefit from automation improvements, were associated with larger employment gains.