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Emissions Pricing Policies and Business Cycles: Fixed vs. Variable Tax Regimes

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  • Fariba Ramezani
  • Charles Harvie
  • Amir Arjomandi

Abstract

As by‐products, emissions follow economic fluctuations. Ignoring this fact in environmental policies can lead to unexpected emissions fluctuations and an increase in intervention costs. Using a real business cycle model, we compare two policies: a fixed tax policy where the price is constant over time and a variable tax regime where the tax rate is set at the beginning of each period. We find that while both programs result in lower emissions, a variable tax regime is preferable since first, it can ensure that the maximum welfare is always achieved, and second, it is more effective in stabilising emissions.

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  • Fariba Ramezani & Charles Harvie & Amir Arjomandi, 2020. "Emissions Pricing Policies and Business Cycles: Fixed vs. Variable Tax Regimes," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(1), pages 76-92, March.
    • Handle: RePEc:bla:ausecr:v:53:y:2020:i:1:p:76-92
    DOI: 10.1111/1467-8462.12347
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