Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies

Don Fullerton (dfullert@illinois.edu) and Dan Karney

No 4891, CESifo Working Paper Series from CESifo

Abstract: In our analytical general equilibrium model where two polluting inputs can be substitutes or complements in production, we study the effects of a tax on one pollutant in two cases: one where both pollutants face taxes and the second where the other pollutant is subject to a permit policy. In each case, we solve for closed-form solutions that highlight important parameters. We demonstrate two important ways that environmental taxes and permits are not equivalent. First, the change in the pollutant facing a tax increase depends on whether the other pollutant is subject to a tax or permit policy. Second, if that other pollutant is subject to a tax, then general equilibrium effects can increase or decrease its quantity (affecting overall welfare). However, when the second pollutant is subject to a permit policy that binds, then welfare is not affected by this spillover effect. Finally, a numerical exercise helps demonstrate these two ways that taxes and permits differ. Using the example of coal-fired power plants, our numerical exercise examines the impacts of increasing a hypothetical carbon tax on the quantity of sulfur dioxide emissions.

Keywords: general equilibrium; pollution tax; tradable permits; carbon dioxide; sulfur dioxide; climate policy; co-benefits; environmental damages (search for similar items in EconPapers)
JEL-codes: H23 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp4891.pdf (application/pdf)

Related works:
Working Paper: Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4891

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe (wohlrabe@ifo.de).