KIET Korea Institute for Industrial Economics and Trade

This paper compared and analyzed the social welfare of country when it implemented the carbon tax system and the tradable permit system, which are pollutant abatement policies. In particular, using contest theory, we analyzed the cases where companies belonging two groups participated in competition to acquire market size to sell their products. The result of this paper are as follows. In contrast to the existing literature, in which the share of preassigned permits determined social welfare under the tradable permit system, when the market price per unit of pollutant emission is higher than the market price per unit when the emission tax is implemented, the social welfare is higher than the carbon tax system. Unlike the previous papers, which concluded that social welfare of carbon tax system is lower than the tradable permit system because it does not induce competition among pollutants, this paper shows that the social welfare is determined by the relative size of market price per unit of pollutant.