Transaction Costs of Upstream Versus Downstream Pricing of [Formula: see text] Emissions

To the best of our knowledge, this is the first paper comparing empirically the transaction costs of the monitoring, reporting and verification (MRV) required by two environmental regulations aimed to cost-efficiently reduce greenhouse gas emissions: a carbon dioxide ([Formula: see text]) tax and an emissions trading system. We do this in the case of Sweden, where a set of firms are covered by both types of regulations—the Swedish [Formula: see text] tax and the European Union’s Emissions Trading System (EU ETS). Our results indicate that there is a significant degree of heterogeneity in the transaction costs of the firms in our sample. Moreover, for some of the firms, the transaction costs are high when compared with the actual cost of the [Formula: see text] tax and the price of the EU ETS. Furthermore, we find that the MRV costs are lower for [Formula: see text] taxation than for the EU ETS, which confirms the general view that regulating emissions upstream via a [Formula: see text] tax yields lower transaction costs vis-a-vis downstream regulation via emissions trading.