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Environmental quality, the macroeconomy, and intergenerational distribution

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Author Info
Heijdra, B.J.
Kooiman, J.P.
Ligthart, J.E. (Tilburg University, Center for Economic Research)

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Abstract

The paper studies the dynamic allocation effects and intergenerational welfare consequences of environmental taxes. To this end, environmental externalities are introduced in a Blanchard-Yaari overlapping generations model of a small open economy. A rise in environmental taxes-taking into account pre-existing distortionary taxes and endogenous labor supply-is shown to yield an effciency gain if agents care enough for the environment. The benefts are unevenly distributed across generations because agents are heterogeneous in their capital ownership. An accompanying debt policy can be designedprescribing debt accumulation at impact and debt redemption in the new steady state-to ensure everybody gains to the same extent. With lump-sum recycling of environmental tax revenue, aggregate employment is unaffected in the short run, but falls in the long run. It raises environmental quality more in the long run than in the short run. Recycling revenue through a cut in labor taxes, however, is shown to yield a rise in employment in the short run, which disappears during transition. In the new steady state, environmental quality is higher at the expense of a lower level of employment.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 73.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200473

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Find related papers by JEL classification:
D60 - Microeconomics - - Welfare Economics - - - General
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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  5. Howarth, Richard B & Norgaard, Richard B, 1992. "Environmental Valuation under Sustainable Development," American Economic Review, American Economic Association, vol. 82(2), pages 473-77, May. [Downloadable!] (restricted)
  6. Heijdra, Ben J & Ligthart, Jenny E, 2000. "The Dynamic Macroeconomic Effects of Tax Policy in an Overlapping Generations Model," Oxford Economic Papers, Oxford University Press, vol. 52(4), pages 677-701, October.
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  7. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
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  12. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September. [Downloadable!] (restricted)
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  20. Guruswamy Babu, P. & Kavi Kumar, K. S. & Murthy, N. S., 1997. "An overlapping generations model with exhaustible resources and stock pollution," Ecological Economics, Elsevier, vol. 21(1), pages 35-43, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ossama Mikhail & J. Walter Milon & Richard Hofler, 2005. "Is Investment in Environmental Quality a Solution to Recessions? Studying the Welfare Effects of Green Animal Spirits," Others 0510010, EconWPA. [Downloadable!]
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