Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies

36 Pages Posted: 14 Aug 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 29, 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.

Keywords: general equilibrium, pollution tax, tradable permits, carbon dioxide, sulfur dioxide, climate policy, co-benefits, environmental damages

JEL Classification: H230

Suggested Citation

Fullerton, Don and Karney, Daniel H., Multiple Pollutants, Uncovered Sectors, and Suboptimal Environmental Policies (July 29, 2014). CESifo Working Paper Series No. 4891. Available at SSRN: https://ssrn.com/abstract=2479812

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)

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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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