Refunded NOx-Emission Payments Scheme: A Viable Alternative to a Pigouvian Tax?

We consider a regulator seeking to achieve a specific target time path of NOx emission reductions, using a refunded emission payments (REP) scheme. The paper's main objective is an efficiency comparison of two REP schemes with different refunding criteria. Both schemes may attain the targets and one of them can achieve the results from using an optimal single emission tax without any refunds. Distributional effects of applying the schemes on firms with different characteristics are also analyzed. If a single tax or a quota system cannot be used, an REP scheme based on emission reduction should be preferred.