Optimal Pollution Tax Research Articles

On optimal extraction under asymmetric information over reclamation costs

Polluting exhaustible resource extraction ends with costly reclamation and producers have better information about future reclamation costs than the regulator. This paper analyzes optimal contract between the regulator and the mining firm in a two-stage model, in which extraction and pollution generation is followed by reclamation with asymmetric information over reclamation costs. The contract consists of a pollution tax and a mechanism used for cost information revelation, and it extracts all the profit from the highest-cost type, leaves profits for the more efficient types and dictates a reclamation effort that is lower than the complete information effort. It is further shown that the optimal pollution tax under asymmetric information can be lower or higher than the tax under complete information. In addition, the exclusion of the most expensive types is analyzed. The results can help to design policies that improve the existing ones by saving public funds, by improving the state of the environment and by excluding those mining operations that do not produce (net) benefits for the society.

Sustainable development: Structural transformation and the consumer demand

This paper examines the feasibility of environmentally sustainable growth in a competitive market economy assuming various types of technological changes affecting pollution emissions and ultimately climate change. We consider two final outputs and two factors of production, accounting for both pollution flow and stock effects. If the initial level of pollution emissions satisfies certain boundary conditions, a Pigouvian pollution tax may assure sustainable growth without any further government intervention. This is true even if exogenous technological change is assumed to benefit exclusively the pollution-intensive industries (the “dirty” sector). A consumers’ composition effect (often neglected in the literature), driven by an endogenous change in the relative prices between clean and dirty final goods under an optimal pollution tax, plays a critical role in the structural transformation process to achieve long-run sustainable economic growth.

Redistribution and pollution taxes with non-linear Engel curves

This paper analyses optimal corrective taxation and optimal income redistribution. The Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, under general utility functions, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if Engel curves are linear, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all have linear Engel curves. If Engel curves are linear, and if pollution taxes are not optimised, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Optimal pollution control in a mixed oligopoly with research spillovers

We study optimal pollution abatement under a mixed oligopoly when firms engage in emissions‐reducing research and development (R&D) with imperfect appropriation. The regulator uses a tax to curb emissions. Results show that in a mixed oligopoly, the public firm has positive emissions reduction in equilibrium; however, emissions reductions of the private firm could be positive or zero. Under certain conditions, the optimal pollution tax is positive; otherwise, the tax reverts to a subsidy. Comparing mixed and private duopolies, privatisation leads to reductions in R&D and output, but to an increase in overall emissions, so privatisation tends to make the environment worse.

On the impossibility of sustainable growth in a manufacturing based economy

This paper investigates a possibility of sustainable growth in a multi-output endogenous growth framework where the capital accumulation takes place mainly through the production of the dirty manufactured goods. It is shown that in a closed economy, economic growth is not environmentally sustainable, even under an optimal pollution tax unless the consumption elasticity of substitution between clean and dirty goods approaches infinity as in a small open economy which exports dirty goods. There exists a minimal threshold level of the ratio of clean to dirty capital that ensures sustainable growth in a closed economy.

Optimal Pollution Control in a Mixed Oligopoly with Research Spillovers

We study optimal pollution abatement under a mixed oligopoly game when firms engage in emissions-reducing RD however, emissions reductions of the private firm could be positive or zero. Under certain conditions, the optimal pollution tax is positive; otherwise, the tax reverts to a subsidy. Comparing mixed and private duopolies, privatization leads to reductions in R&D and output, but to an increase in overall emissions, so privatization tends to make the environment worse.

Profitable pollution abatement? A worker productivity perspective

Based on the empirical evidence that improved environmental quality makes workers more productive, this paper develops a model that pollution abatement can raise firm profitability by enhancing worker productivity. We investigate two types of environmental regulations – government intervention and voluntary regulation, showing that both can induce the collective action of imperfectly competitive firms to abate pollution, which increases their profits as well as social welfare. A pollution tax can prompt a firm to raise output if the productivity gain arising from total pollution reduction offsets the firm's pollution cost. We characterize the optimal pollution tax and demonstrate that the combination of a pollution tax and an output subsidy can lead to the social optimum. Voluntary regulation tends to fully internalize the productivity effect of reduced pollution for firms, although it facilitates firms’ collusion in restricting production. Moreover, we conduct a simulation evaluating the welfare consequences of the two regulations in comparison with the social optimum.

Optimal tax policy under heterogeneous environmental preferences

We model an economy of K heterogeneous regions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generates a negative externality on neighbors. We show that even with a decentralized policy we can obtain first-best efficiency by choosing a combination of pollution taxes in both regions and lump-sum transfers. Moreover, we show that optimal pollution taxes are determined only by the externality parameters, independent of agents’ preferences for consumption and nature.

Integrating behavioural economics into climate-economy models: some policy lessons

ABSTRACTVarious macroeconomic models have been proposed to study the effects of climate policies. But from many corners now, it has been argued that these models are inadequate as tools for policy analysis. In particular, extreme impacts of climate change, inherent uncertainty, and discounting have been widely discussed as flaws of current models. Surprisingly, unrealistic assumptions about individual behaviour, which ignore well-documented behavioural ‘anomalies’ and social interactions, have attracted little attention so far in the economic analysis of climate change impacts and policies. This article begins to address this gap by providing an overview of formal macro-behavioural models, designed to incorporate a variety of realistic behaviours, such as present bias, habit formation, loss-aversion, and social status into economic theory. We show that ignoring behavioural anomalies may undermine the effectiveness of climate policies, which we illustrate with examples of optimal pollution tax and the social cost of carbon. In addition, we study the probability of the rebound effect in each behavioural model. The rebound effect describes a situation where improvements in energy efficiency render a reduction in energy consumption less than proportional. We show that status concerns make the economy more conducive to the rebound effect compared to a model with fully rational agents. Models of habit formation and loss aversion can have the opposite effect.POLICY RELEVANCECurrent models to assess climate policies may deliver biased insights owing to the omission of essential aspects of bounded rationality. The discounted utility framework, which describes how consumers trade current versus future consumption, is typically used to evaluate climate policies. Climate change economists have largely ignored alternative behavioural models, which integrate into economic theory realistic behaviours, such as: present bias, habit formation, loss-aversion, and social status. This is surprising in the light of evidence that virtually every assumption underlying the discounted utility model has been tested and found to be an invalid description of how people actually behave. We show with examples how well-established anomalies can undermine the effectiveness of climate policies.

Should Pollution Taxes Be Targeted at Income Redistribution?

This paper analyses optimal corrective taxation and optimal income redistribution. Under general utility functions, the Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if preferences for commodities are of the Gorman (1961) polar form, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If preferences are Gorman polar, and if pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Should Pollution Taxes Be Targeted at Income Redistribution?

This paper analyses optimal corrective taxation and optimal income redistribution. Under general utility functions, the Pigouvian pollution tax is higher if pollution damages disproportionally hurt the poor due to equity weighting of pollution damages. Moreover, optimal pollution taxes should be set below the Pigouvian tax if the poor spend a disproportionate fraction of their income on polluting goods. However, if preferences for commodities are of the Gorman (1961) polar form, optimal pollution taxes should follow the first-best rule for the Pigouvian corrective tax even if the government wants to redistribute income and the poor spend a disproportional part of their income on polluting goods. The often-used quasi-linear, CES and Stone-Geary utility functions all belong to the Gorman polar class. If preferences are Gorman polar, and if pollution taxes are not optimized, Pareto-improving green tax reforms exist that move the pollution tax closer to the Pigouvian tax. Simulations demonstrate that optimal corrective taxes should be Pigouvian if the demand for polluting goods is derived from a LES demand system, but deviate from the Pigouvian taxes if demand for polluting goods demand is derived from a PIGLOG demand system.

Pollution Tax Under Imperfect Competition and Air Transport in a Domestic Economy

This paper empirically demonstrates the possibility of setting up an optimal pollution tax under imperfect markets and international trade in a domestic economy. The model illustrates a situation of partial equilibrium characterized by imperfect competition among domestic producers, where the domestic good is used as an alternative for an imported polluting commodity. In this paper, we bring in the possibility that the domestic firms can introduce innovative ideas through investment in R&D. The result shows that the optimal pollution tax under domestic economic distortions is a function of a ‘domestic production effect’ and a ‘pollution effect’. The paper concludes that when the firms execute R&D expenditures, the optimal policy adds an ‘innovative effect’, which captures the change in welfare coming from a reduction in total costs and this lead our results to a win-win situation.

Modeling environmental policy with and without abatement substitution: A tradeoff between economics and environment?

This study proposes a set of optimal emission taxes that could be used to fully internalize environmental externalities. Carbon fees are computed for low-income economies, lower-middle-income economies, upper-middle-income economies, high-income economies, China and the United States. Subsequently, the implementation of these emission taxes is evaluated under two different scenarios; one assuming abatement substitution and the other relaxing this assumption. Estimated damages and abatement from various sectors lie between 0.0003 to 0.021 and 0.001 to 0.012lb per dollar output respectively. Optimal pollution taxes per dollar output range as high as 2.8% for heavy manufacturing in the high income countries, and as low as 0.01% in the service sectors of the low income countries. On the impacts of these taxes, the study produces evidence that, whether abatement substitution is present or not, production in low-income economies would be less adversely affected due to carbon taxes relative to high-income countries. In addition, the emissions taxes reduce environmental damages by nearly 50% in all regions. Worldwide welfare gains from internalizing negative externalities when no abatement substitution is present is about three times the welfare gains in the presence of abatement substitution. Although these results imply a sort of tradeoff between the economics of production and environment, improved environmental benefits due to carbon taxes seem to outweigh the deterioration in economic activities; and as such, welfare improves in general.

Environmental Impacts of Tariff and Tax Reforms Under Origin and Destination Principles

AbstractThe impacts of a point‐by‐point tariff/tax reform on the environment under the origin‐based or destination‐based tax principle are examined. The policy reform under the origin‐based principle can raise the optimal pollution tax and, hence, improve the environment when the consumption demand and pollution are strongly substitutable, whereas the reform under the destination‐based principle lowers the optimal pollution tax and, hence, worsens the environment. Nonetheless, when the consumption demand and pollution exhibit weak substitutes or even complements, the tariff/tax reform results in less environmental deterioration under the destination‐based principle.

Pollution–income dynamics

This paper integrates the scale, composition, and technique effects of economic growth on pollution using a multi-output endogenous growth framework. Under certain empirically verifiable parameter conditions economic growth is not sustainable, even under an optimal pollution tax.

The Misinterpretation of Pigouvian Taxes

The tax revenues from Pigouvian taxes are difficult to calculate. The optimal pollution taxes are weighted averages of Ramsey taxes and Pigouvian taxes, and the entanglement of environmental, fiscal and other taxes complicate the measurements. The present international environmental tax statistics do not rely on a theoretical basis, and include several fiscal and resource taxes. Starting with the additivity theorem by Sandmo [1], we propose theoretically consistent guidelines for environmental tax statistics. Calculations based on this framework prove that the present international official statistics (Eurostat, IEA, OECD) severely overestimate environmental taxes. The lack of theoretical consistency forms arbitrary results and the statistics used as measures of environmental taxes may cause major flaws in research and policy-making based on such statistics.

Model Analysis of Optimal Pollution Tax under Environment Rent Philosophy

This paper uses the concept of environment rent philosophy to explain rationale for government taxation and principles of taxation, and uses mathematical models to specifically discuss practical problems of government pollution taxation under this philosophy. The model provides mathematical equations for optimal decision-making by consumers, producers, and government and analyzes the impact of changes in taxation rates on the three parties.

Optimal Policy Combinations of Abatement Subsidy and Pollution Tax in Vertical Oligopolies

This article investigates environmental regulations on eco-industry in vertical oligopolies, in which the upstream industry produces abatement goods reducing pollutants and the downstream industry produces consumption goods emitting pollutants. We devise the optimal combination of appropriate policy instruments and show that an optimal pollution tax should be used for the negative externality and output restrictions in final production, and an optimal abatement subsidy should incorporate the effect of upstream market restrictions on abatement activity. We also examine the welfare effect of the subsidy policy on the abatement technology in tax/subsidy combination.

On a Fundamental Advantage of Permits Over Taxes for the Control of Pollution

We extend the tax versus permits literature by considering permit supply functions and pollution tax functions that are generalizations of the usual constant permit supply and constant pollution tax rate. In our model, pollution is not uniformly mixed and the regulator is uncertain about the polluting firms’ abatement costs. We determine the optimal permit supply functions and the optimal pollution tax functions. Using these functions, we show that permits lead unambiguously to lower total expected costs than taxes. We analyze the magnitude of this difference for a simple model of climate change. By relating the optimal permit supply functions to Weitzman (Am Econ Rev 68:683–691, 1978) we provide a new interpretation of his results.

Environmental policy and lobbying in small open economies

This paper analyzes consequences of lobby group activity for policy outcomes in economies with transboundary pollution and international environmental policies. International environmental policies are here characterized as pollution taxes determined in a negotiation between two countries. The optimal pollution taxes are characterized and comparative statics are carried out to increase the understanding of mechanisms underlying pollution taxes in the specified setup. It is found, among other things, that the presence of local lobbying may decrease, as well as increase pollution taxes – depending on, e.g. an assumption of symmetry.