The Choice of Environmental Policy Instruments: Energy Efficiency and Redistribution
35 Pages Posted: 24 Mar 2010
Date Written: March 2010
We analyse optimal environmental policies in a market that is vertically differentiated in terms of the energy efficiency of products. Considering energy taxes, subsidies to firms for investment in more eco-friendly products, and product standards, we are particularly interested in how distributional goals in addition to environmental goals shape the choice of policy instruments. Surprisingly, we find that an industry-friendly government levies an energy tax to supplement a lax product standard, but shies away from subsidies to firms. By contrast, a consumer-friendly government relies heavily on a strict product standard and in addition implements a moderate subsidy to firms, but avoids energy taxes.
Keywords: energy tax, energy efficiency standard, subsidy, vertically differentiated markets, product quality
JEL Classification: Q58, Q48, L13, L15, L50
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