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

## Author

Listed:
• Konstantinos Angelopoulos

(University of Glasgow)

• George Economides

(Athens University of Economics and Business)

• Apostolis Philippopoulos

(Athens University of Economics and Business, University of Glasgow and Visiting Scholar at the Bank of Greece)

## 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.

## Suggested Citation

• Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2010. "What is the best environmental policy?Taxes, permits and rules under economic and environmental uncertainty," Working Papers 119, Bank of Greece.
• Handle: RePEc:bog:wpaper:119
as

File URL: http://www.bankofgreece.gr/BogEkdoseis/Paper2010119.pdf
File Function: Full Text

## References listed on IDEAS

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## Citations

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Cited by:

1. 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.
2. Carolyn Fischer & Garth Heutel, 2013. "Environmental Macroeconomics: Environmental Policy, Business Cycles, and Directed Technical Change," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 197-210, June.
3. Kaiyan Luo & Xingping Zhang & Qinliang Tan, 2016. "Novel Role of Rural Official Organization in the Biomass-Based Power Supply Chain in China: A Combined Game Theory and Agent-Based Simulation Approach," Sustainability, MDPI, Open Access Journal, vol. 8(8), pages 1-23, August.
4. Annicchiarico, Barbara & Di Dio, Fabio, 2015. "Environmental policy and macroeconomic dynamics in a new Keynesian model," Journal of Environmental Economics and Management, Elsevier, vol. 69(C), pages 1-21.
5. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, 2013. "First-and second-best allocations under economic and environmental uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 360-380, June.

### Keywords

General equilibrium; uncertainty; environmental policy;

### JEL classification:

• C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
• D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
• H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

### NEP fields

This paper has been announced in the following NEP Reports:

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