Pigouvian Level Research Articles

Interaction between trade and environment policies with special‐interest politics

PurposeThe purpose of the paper is to examine the interdependencies between trade and environment policies, as they get jointly determined in a political‐economy model of a small open economy. In theoretical literature, government is usually modeled as benevolent. In real economies, however, it is not a pure social welfare maximizer. Lobbies have stakes in the specific policies, and they negotiate with/bribe the government over the latter's policy stance. The influence of industry lobbying on both trade and the environment policies at the political equilibrium is the focus of the paper.Design/methodology/approachConcepts from non‐cooperative game theory are used to incorporate a Nash‐bargaining game between the industry lobby and government. Government is not benevolent. Campaign contributions help win elections and provide incentive to distort policies to attract lobby contributions. Several situations are modeled. Given a politically set environment policy, tariffs may be zero in view of the free trade agreements. Or, a sequential game is modeled where environment policy is set to maximize social welfare, given a politically determined trade policy. Alternatively, in the full political equilibrium, government and lobby bargain simultaneously over tariff and the environmental tax.FindingsLobbying implies that government may trade‐off one policy for another. When only environment policy is politically manipulable by the lobby, pollution tax is lower than the Pigouvian tax. If, instead, the lobby can influence trade policy only, government provides protection to domestic import‐competing sector. In a sequential game, the trade policy outcome does not change, but pollution tax is always higher than the Pigouvian level, even with the environmental lobby absent. With both the policies political, the government “concedes” and offers positive tariff protection, but, not on environment policy; that is, imposes a pollution tax higher than the Pigouvian level.Originality/valueThe paper provides useful insights into how, under the influence of special‐interest politics, and bargaining between the government and lobbies, the trade and environment policies interact with each other. In comparison with the existing literature on this issue, it derives several stronger and (apparently) counter‐intuitive conclusions.

Feed-in-Tariffs for Electricity from Renewable Energy Resources to Move down the Learning Curve?

We develop a model with two types of electricity producers, fossil fuel utilities generating emissions, and suppliers of electricity from of renewable energy sources (RES-E). We account for the vertical structure of the renewable energy sector by considering upstream RES-E equipment producers engaged in learning-by-doing and selling their equipment to downstream operators. We show that under pure private learning a first-best allocation can be induced by charging emission taxes on the Pigouvian level only, while in the case of learning spillovers additional subsidies on both output and market entry are necessary. In case that (optimal) emission taxes are ruled out, then in case of purely private learning, second-best optimal feed-in-tariffs should only account for the marginal environmental damage and the marginal cost of production of the conventional utilities. In the case of learning spillovers, feed-in-tariffs can also be used to spur learning.

Feed-in-Tariffs for Electricity from Renewable Energy Resources to Move down the Learning Curve?

We develop a model with two types of electricity producers, fossil fuel utilities generating emissions, and suppliers of electricity from of renewable energy sources (RES-E). We account for the vertical structure of the renewable energy sector by considering upstream RES-E equipment producers engaged in learning-by-doing and selling their equipment to downstream operators. We show that under pure private learning a first-best allocation can be induced by charging emission taxes on the Pigouvian level only, while in the case of learning spillovers additional subsidies on both output and market entry are necessary. In case that (optimal) emission taxes are ruled out, then in case of purely private learning, second-best optimal feed-in-tariffs should only account for the marginal environmental damage and the marginal cost of production of the conventional utilities. In the case of learning spillovers, feed-in-tariffs can also be used to spur learning.

Biofuel Subsidies: An Open-Economy Analysis

We present a general equilibrium analysis of biofuel subsidies in an open-economy context. In the small-country case, when a Pigouvian tax on conventional fuels such as crude is in place, the optimal biofuel subsidy is zero. When the tax on crude is not available as a policy option, however, a second-best biofuel subsidy (or tax) is optimal. In the large-country case, the optimal tax on crude departs from its standard Pigouvian level and a biofuel subsidy is optimal. A biofuel subsidy spurs global demand for food and confers a terms-of-trade benefit to the food-exporting nation. This might encourage the food-exporting nation to use a subsidy even if it raises global crude use. The food importer has no such incentive for subsidization. Terms-of-trade effects wash out between trading nations; hence, any policy intervention by the two trading nations that raises crude use must be jointly suboptimal.

Linking Environmental and Innovation Policy

This paper addresses the timing and interdependence between innovation and environmental policy in a model of research and development (R&D). On a first-best path the environmental tax is set at the Pigouvian level, independent of innovation policy. With infinite patent lifetime, the R&D subsidy should be constant and independent of the state of the environment. However, with finite patent lifetime, optimal innovation policy depends on the stage of the environmental problem. In the early stages of an environmental problem, abatement research should be subsidized at a high level and this subsidy should fall monotonically over time to stimulate initial R&D investments. Alternatively, with a constant R&D subsidy, patents' length should initially have a very long life-time but this should be gradually shortened. In a second-best situation with no deployment subsidy for abatement equipment, we find that the environmental tax should be high compared to the Pigouvian levels when an abatement industry is developing, but the relative difference falls over time. That is, environmental policies will be accelerated compared to first-best.

Optimal Environmental Tax and Level of Privatization in an International Duopoly

This paper explores the optimal environmental tax and level of privatization in an international duopolistic market. We show that when the government is able to control the environmental tax and the extent of privatization, the optimal environmental tax is lower than the standard Pigouvian level. We also show that the optimal level of privatization of state-owned enterprises is partial privatization. Further, the optimal level of privatization is inversely dependent on the cleanup cost of past environmental contamination.

Essays on Uncertainty and Decision-Making in Environmental Economics

This draft PhD thesis analyzes four issues in the research field that consists of the intersection of environmental economics, uncertainty, and decision-making. 1. Economic investments that lead to environmental damages beyond repair - like cutting rainforests or emitting pollutants with long life times - can be interpreted as irreversible investments with uncertain pay-offs. In the context of irreversible investments under uncertainty two different concepts of option value were developed. They account for the value of keeping options open - i.e. postponing the irreversible investment - in the presence of potential future learning about the social profitability of the investment. These are the concept of quasi-option value (value of information) developed in the environmental and resource economic literature and the concept of real option value (value of the option to postpone) developed in the financial economics literature. This thesis shows that the quasi-option value (value of information) is that part of the real option value (value of the option to postpone) that is related to uncertainty being resolved over time. This means that common knowledge in the environmental and resource economic literature with respect to the relation of both concepts is not correct. 2. If marginal damages of pollution rise with the pollution level, low marginal pollution abatement costs demand a relatively low Pigouvian tax - the pollution tax level that leads to optimal abatement. As a result, to determine the Pigouvian tax level, a regulator needs to know pollution abatement costs, information that is privately owned by individual pollutors. Unfortunately, pollutors have no intention to reveal their true abatement costs. One text book solution to this problem is that the regulator keeps adapting the tax level until the pollution tax leads to an emission level resulting in marginal damages equal to the tax level - the criterium for social optimality. That is, only after an unspecified amount of time and abatement adaptation costs the socially optimal abatement level is reached. This thesis shows there exists a non-linear tax system, the so called differential tax that triggers firms to reveal their abatement costs truthfully and will lead to socially optimal abatement levels instantly, thereby reducing social costs compared to the iterative solution. 3. In the presence of environmental innovation, future abatement costs are unknown by the polluting firms as well. Under those circumstances the regulator is needs a tax system that is flexible with respect to falling abatement costs through innovation (please recall that lower marginal abatement costs demand a lower Pigouvian tax) as well as keeps incentives for innovation - created by pollution taxes after innovation - upright. This thesis analyzes the effects of a robust second-best pollution taxation scheme that combines flexibility to cope with changing marginal abatement costs with commitment to relatively high tax levels to create incentives for environmental innovation. It shows that this instrument is superior to time consistent taxation. Superiority of the flexible taxation scheme with respect to commitment to a linear tax could not be shown. 4. The use of quantitative model results to support policy making is one way social sciences might have a positive effect on real world decision making. This thesis identifies decision-maker related potential errors made in the interpretation of quantitative model results. It is argued these errors can be prevented by the social scientist by stating explicitly for which policy maker and for what purpose the model results are meant for.

Optimal Environmental Regulation in the Presence of Other Taxes: The Role of Non-separable Preferences and Technology

Abstract Recent studies find that environmental taxes typically exacerbate pre-existing tax distortions and, therefore, the optimal pollution tax should lie below the Pigouvian level (social marginal damages). This paper analyzes a general equilibrium model with non-separable preferences and technology, relatively rare assumptions in this literature, and finds that the second-best optimal pollution tax can be above or below the first-best Pigouvian level. Surprisingly, the ordering of the two does not depend on the degree of pre-existing tax distortion. Moreover, it depends not just on the difference between the two goods' cross-price elasticities with leisure, but on that difference compared to the elasticity of demand for the polluting intermediate input. Finally, the paper shows that under plausible parameter conditions, a greater pre-existing tax distortion can increase the optimal level of environmental regulation.

Environmental taxes with heterogeneous consumers: an application to energy consumption in France

This paper constructs a model with four groups of households who have preferences over labor supply, consumption of polluting (energy related) and non-polluting (non-energy) goods, and emissions. It quantifies the model for the French economy and computes its optimal tax equilibria under nine second-best tax regimes. We find that the redistributive role of environmental taxes requires the polluting goods to be taxed at a rate much below their marginal social damage. These goods may even require an outright subsidy if the society values equality ‘a lot’. Secondly, if environmental taxes that have an exclusively externality-correcting role, they benefit all types—although the gains are rather modest. The gains and losses become more substantial when environmental taxes have a redistributive role as well. Third, setting the environmental tax at its Pigouvian level, rather than its optimal externality-correcting-cum-redistributive level, benefits the high-income group at the expense of the low-income groups. Fourth, nonlinear taxation of polluting goods, and nonlinear commodity taxation in general, is a powerful redistributive mechanism. Fifth, introducing environmental taxes in the current French tax system, with its suboptimal income taxes, results in substantial welfare gains for the highest income group and a sizable loss for the least well-off persons.

Optimal fiscal policy in a dynamic multicountry world with public services

The authors construct a dynamic one‐good multicountry growth model with productive government spending and perfect capital mobility to study fiscal interdependence among countries. In the case of a source‐based tax, it is found that there is no strategic interaction and that the equilibrium spending/tax mix coincides with the optimal one. In the case of a residence‐based tax system, however, there is strategic interaction across countries and, under noncooperation, countries tend to spend and tax over and above the optimal Pigouvian level.

Efficient environmental taxation under moral hazard

We study implementation of first-best equilibria in an economy where the government faces no revenue constraint, firms pollute, and there are two types of moral hazard, due to (1) imperfect enforcement of worker effort with respect to both output and environmental care; and (2) limited management liability for accident damage. When aggregate worker effort is given and there is no accident risk, we show that both firms' output and their current operation should be subsidized, and the environmental tax set according to a `modified Pigouvian' rule, whereby it exceeds the Pigouvian level by a factor equal to the output subsidy rate. When the pollution level affects the accident risk, the first-best pollution tax exceeds the `modified Pigouvian' level.