Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies

Don Fullerton () and Daniel H. Karney

No 20334, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H23 Q48 Q53 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-pbe
Note: EEE PE
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Citations: View citations in EconPapers (8)

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Working Paper: Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies (2014)
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