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What is the best environmental policy? Taxes, permits and rules under economic and environmental uncertainty

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  • Konstantinos Angelopoulos

    ()
    (University of Glasgow)

  • George Economides

    ()
    (Athens University of Economics and Business)

  • Apostolis Philippopoulos

    ()
    (Athens University of Economics and Business)

Abstract

We welfare rank different types of second-best environmental policy. The focus is on the roles of uncertainty and public finance. The setup is the basic stochastic neoclassical growth model augmented with the assumptions that pollution occurs as a by-product of output produced and environmental quality is treated as a public good. To compare different policy regimes, we compute the welfare-maximizing value of the second-best policy instrument in each regime. In all cases studied, pollution permits are the worst recipe, even when their revenues are used to finance public abatement. When the main source of uncertainty is economic, the best recipe is to levy taxes (on pollution or output) and use the collected tax revenues to finance public abatement. However, when environmental uncertainty is the dominant source of extrinsic uncertainty, Kyoto-like rules for emissions, being combined with tax-financed public abatement, are better than taxes. Finally, comparing pollution and output taxes, the latter are better.

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Bibliographic Info

Paper provided by Athens University of Economics and Business in its series DEOS Working Papers with number 1013.

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Length: 36 pages
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Handle: RePEc:aue:wpaper:1013

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Keywords: General equilibrium; uncertainty; environmental policy.;

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References

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  1. Takumi Haibara, 2009. "Environmental Funds, Public Abatement, and Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 44(2), pages 167-177, October.
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Cited by:
  1. Barbara Annicchiarico & Fabio di Dio, 2013. "Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model," CEIS Research Paper, Tor Vergata University, CEIS 286, Tor Vergata University, CEIS, revised 30 Sep 2013.
  2. Donatella Baiardi & Mario Menegatti, 2011. "Pigouvian tax, abatement policies and uncertainty on the environment," Journal of Economics, Springer, Springer, vol. 103(3), pages 221-251, July.
  3. Angelopoulos, Konstantinos & Economides, George & Philippopoulos, Apostolis, 2010. "First-and second-best allocations under economic and environmental uncertainty," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-99, Scottish Institute for Research in Economics (SIRE).
  4. Garth Heutel & Carolyn Fischer, 2013. "Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change," NBER Working Papers 18794, National Bureau of Economic Research, Inc.
  5. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2013. "First-and second-best allocations under economic and environmental uncertainty," International Tax and Public Finance, Springer, Springer, vol. 20(3), pages 360-380, June.

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