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The Present Value Criterion and Environmental Taxation: The Suboptimality of First-Best Decision Rules

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  • Richard B. Howarth

Abstract

This paper examines the links between environmental taxes and distortionary taxation in a dynamic model of climate change and economic growth. Under first-best conditions, labor and capital would remain untaxed, and carbon dioxide emissions would be taxed at a rate equal to the present-value marginal cost they impose on future society, setting the discount rate equal to the marginal productivity of capital. Under secondbest conditions, however, this decision rule substantially understates optimal emissions taxes when the resulting revenues are used to provide targeted cuts in distortionary taxes. Conversely, relatively low emissions taxes are economically justified given lump-sum revenue recycling.

Suggested Citation

  • Richard B. Howarth, 2005. "The Present Value Criterion and Environmental Taxation: The Suboptimality of First-Best Decision Rules," Land Economics, University of Wisconsin Press, vol. 81(3).
  • Handle: RePEc:uwp:landec:v:81:y:2005:i:3:p321-336
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    Cited by:

    1. William Jaeger, 2011. "The Welfare Effects of Environmental Taxation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(1), pages 101-119, May.
    2. Howarth, Richard B., 2006. "Optimal environmental taxes under relative consumption effects," Ecological Economics, Elsevier, vol. 58(1), pages 209-219, June.

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    More about this item

    JEL classification:

    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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