Choice of environmental policy instruments and welfare in middle-income countries: the case of Cote d'Ivoire

Abstract

The purpose of this paper is to determine among pollution taxes, rules and combination of rules-taxes instrument, one that allows increasing welfare in MICs that face economic and environmental shocks. To do this, we used a dynamic stochastic general equilibrium (DSGE) model whose parameters are estimated on the Ivoirian economy by the Bayesian method. Results of welfare comparison under three regimes show, on the one hand, that when public abatement spending is effective, welfare under pollution taxes is higher than pure rules if shocks are strong. But when rules are combined with output taxes for public clearance spending (mixed instrument), welfare under this mixed instrument becomes better than pollution taxes regardless of the type of shock. On the other hand, when the government intervention is inefficient, welfare under pollution taxes is almost equivalent to pure rules but remains lower than the mixed instrument.