Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies

36 Pages Posted: 28 Jul 2014

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Daniel H. Karney

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

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.

Suggested Citation

Fullerton, Don and Karney, Daniel H., Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies (July 2014). NBER Working Paper No. w20334. Available at SSRN: https://ssrn.com/abstract=2472791

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Daniel H. Karney

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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