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

Fariba Ramezani, Charles Harvie and Amir Arjomandi

Australian Economic Review, 2020, vol. 53, issue 1, 76-92

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.

Date: 2020
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