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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
  • George Economides
  • Apostolis Philippopoulos

Abstract

We study the importance of uncertainty and public finance to the welfare ranking of three environmental policy instruments: pollution taxes, pollution permits and Kyoto-like numerical rules for emissions. 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 alternative policies, we compute welfare-maximizing values for the second-best policy instruments. We find that, in all cases studied, pollution permits are the worst policy choice, even when their revenues finance public abatement. When the main source of uncertainty is economic, the most efficient recipe is to levy pollution taxes and use the collected tax revenues to finance public abatement. However, when environmental uncertainty is the dominant source of extrinsic uncertainty, numerical rules, being combined with tax-financed public abatement, are better than pollution taxes.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2980.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_2980

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Keywords: general equilibrium; uncertainty; environmental policy;

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References

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  1. George Economides & Apostolis Philippopoulos, 2008. "Growth enhancing policy is the means to sustain the environment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 207-219, January.
  2. Beverly Hirtle, 2008. "Credit derivatives and bank credit supply," Staff Reports 276, Federal Reserve Bank of New York.
  3. Thomas F. Cooley & Gary D. Hansen, 1991. "Tax distortions in a neoclassical monetary economy," Discussion Paper / Institute for Empirical Macroeconomics 38, Federal Reserve Bank of Minneapolis.
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  8. Andres, Javier & Domenech, Rafael & Fatas, Antonio, 2008. "The stabilizing role of government size," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 571-593, February.
  9. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
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  13. Alan J. Auerbach, 2010. "Public Finance in Practice and Theory ," CESifo Economic Studies, CESifo, vol. 56(1), pages 1-20, March.
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  16. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  17. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
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  22. Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, vol. 53(6), pages 689-714, August.
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Citations

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Cited by:
  1. Fischer, Carolyn & Heutel, Garth, 2013. "Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change," Working Papers 13-2, University of North Carolina at Greensboro, Department of Economics.
  2. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2010. "First-and second-best allocations under economic and environmental uncertainty," Working Papers 2010_35, Business School - Economics, University of Glasgow.
  3. Donatella Baiardi & Mario Menegatti, 2011. "Pigouvian tax, abatement policies and uncertainty on the environment," Journal of Economics, Springer, vol. 103(3), pages 221-251, July.
  4. Barbara Annicchiarico & Fabio di Dio, 2013. "Environmental Policy and Macroeconomic Dynamics in a New Keynesian Model," CEIS Research Paper 286, Tor Vergata University, CEIS, revised 30 Sep 2013.

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