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Efficient Dynamic Pollution Taxation in an Uncertain Environment

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  • Susanne Soretz

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Abstract

This paper analyzes efficient pollution taxation within a stochastic model of endogenous growth. Pollution is a by-product of production and causes disutility. Furthermore, the productivity which results from environmental quality is uncertain. This reflects e.g. uncertain capital depreciation induced by natural disasters like hurricanes or floods. This uncertainty is shown to raise an ambiguous impact on the optimal pollution level as well as on optimal environmental taxation. Market equilibrium turns out to be suboptimal, since the households mis-perceive their individual impact on pollution. Conditions for welfare maximizing pollution taxation are stated and it is shown that a direct pollution tax is not appropriate to yield Pareto-optimal growth. Instead, a linear capital income tax together with a linear abatement subsidy build an efficient tax scheme, if secondarily the governmental budget is balanced. Moreover, an increase in the riskiness of environmental productivity may even lead to an increase in the optimal pollution level and to a decrease in optimal environmental taxation, depending predominantly on the preference parameters. Copyright Springer Science+Business Media, Inc. 2007

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Bibliographic Info

Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 36 (2007)
Issue (Month): 1 (January)
Pages: 57-84

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Handle: RePEc:kap:enreec:v:36:y:2007:i:1:p:57-84

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Web page: http://www.springerlink.com/link.asp?id=100263

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Keywords: pollution; taxation; uncertainty; endogenous growth; D8; D9; H2; O1; O4; Q2;

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Citations

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Cited by:
  1. Horii, Ryo & Ikefuji, Masako, 2010. "Natural Disasters in a Two-Sector Model of Endogenous Growth," Working Papers 86, Yale University, Department of Economics.
  2. Donatella Baiardi & Matteo Manera & Mario Menegatti, 2014. "The Effects of Environmental Risk on Consumption: an Empirical Analysis on the Mediterranean Countries," Working Papers 2014.43, Fondazione Eni Enrico Mattei.
  3. Jasmin Katrin Gröschl, 2013. "Gravity Model Applications and Macroeconomic Perspectives," ifo Beiträge zur Wirtschaftsforschung, Ifo Institute for Economic Research at the University of Munich, number 48, 8.
  4. Lucas Bretschger & Sjak Smulders, 2007. "Sustainable Resource Use and Economic Dynamics," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 36(1), pages 1-13, January.
  5. Gabriel J. Felbermayr & Jasmin Gröschl, 2013. "Naturally Negative: The Growth Effects of Natural Disasters," CESifo Working Paper Series 4439, CESifo Group Munich.
  6. Giuseppe Travaglini, 2012. "Pollution control: targets and dynamics," Working Papers 1201, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
  7. M. Menegatti & D. Baiardi, 2010. "Pigouvian Tax, Abatement Policies and Uncertainty on the Environment," Economics Department Working Papers 2010-EP04, Department of Economics, Parma University (Italy).

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