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

Konstantinos Angelopoulos, George Economides and Apostolis Philippopoulos
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Konstantinos Angelopoulos: University of Glasgow
Apostolis Philippopoulos: Athens University of Economics and Business, University of Glasgow and Visiting Scholar at the Bank of Greece

No 119, Working Papers from 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.

Keywords: General equilibrium; uncertainty; environmental policy (search for similar items in EconPapers)
JEL-codes: C68 D81 H23 (search for similar items in EconPapers)
Pages: 47
Date: 2010-10
New Economics Papers: this item is included in nep-ene, nep-env, nep-reg and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (57)

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Related works:
Working Paper: What is the best environmental policy? Taxes, permits and rules under economic and environmental uncertainty (2010)
Working Paper: What is the Best Environmental Policy? Taxes, Permits and Rules under Economic and Environmental Uncertainty (2010)
Working Paper: What is the best environmental policy? Taxes, permits and rules under economic and environmental uncertainty (2010)
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