Tax policy or carbon emission quota: A theory on traditional ICEV transportation regulation

Abstract

This study investigates the environmental consequences of consumers opting for traditional internal combustion engine vehicles (ICEVs), resulting in heightened pollution. Given the critical importance of addressing environmental degradation and its impact on societal welfare, our research aims to provide insights into effective policymaking strategies. In an ideal scenario, a benevolent planner would equitably distribute wealth, forming the first-best policy. Recognizing the impracticality of this ideal, we propose two viable second-best policies: an income-based tax and the implementation of a carbon emission quota. Theoretical analysis highlights the efficacy of the tax policy in pollution reduction, particularly with the growing number of mid-income electric vehicle consumers. The optimal tax policy adeptly navigates the delicate balance between pollution and income effects. Furthermore, we establish that the optimal pollution quota under the carbon emission policy is lower than in both competitive and first-best scenarios. A numerical comparison of the four equilibrium outcomes underscores these findings. In addition, we advocate for a blockchain-based decentralized carbon emission quota trading platform to digitize and optimize allocation and compliance processes, fostering more efficient and transparent environmental management.