A Second-best Pollution Solution with Separate Taxation of Commodities and Emissions (original) (raw)

Optimal Green Taxation With Both Emission and Commodity Taxes

Several authors have argued that the second-best environmental tax on a “dirty good” is less than marginal emission damage associated with its consumption. These studies limit their analysis to cases in which emissions can only be reduced by a reduction of the dirty good. With a more general specification that allows abatement through input substitution, we show that the direct emissions tax cannot be less than marginal emission damage, regardless of the normalization.

Second-best taxation of emissions and polluting goods

Journal of Public Economics, 2001

This paper studies the problem of the design of an integrated system of second-best emission and output taxes in a model where production costs are negatively correlated with their emissions. It shows that (i) the first-best Pigouvian rule (of equating the marginal private benefit of emissions in production to the marginal social damage of emissions) must be modified in the second-best; (ii) implementation of the modified Pigouvian rule requires all firms to face the same marginal emission tax equal to the marginal social damage of emissions plus an adjustment term reflecting optimal tax objectives; (iii) it may not be necessary to directly tax the polluting goods; the latter taxes can be subsumed in the emission tax function; (iv) output taxes must be set solely on the basis of optimal tax objectives; no Pigouvian adjustment is required; (v) if emission taxes are restricted to be proportional, and commodity taxes are constrained, the modified Pigouvian rule will no longer be optimal; (vi) If preferences are weakly separable in emissions and other goods, the Pigouvian rule remains valid, the marginal emission tax is Pigouvian, and emission and commodity tax instruments can be set separately to address different objectives: A proportional emission tax corrects for externalities, while commodity taxes are determined solely on the basis of optimal tax considerations. JEL classifications: H21; H23

Second-best pollution taxes: revisited and revised

Environmental Economics and Policy Studies, 2015

This paper examines second-best pollution taxation within a unified framework, which simultaneously takes into account society's preferences towards producer profits and environmental costs, the possibility of raising public revenue through pollution taxes and the costly administration of pollution taxes. Several new results were derived concerning the discrepancy between second-best taxes and the Pigouvian rule. In addition, this paper shows that previous results identified in the relevant literature are special cases of our results. It should be stressed, however, that the comparison between first-best and second-best taxation is an empirical issue. Finally, the policy implications of the results are also discussed.

Second-Best Pollution Taxes and the Structure of Preferences

2001

We characterize optimal taxes on polluting and nonpolluting goods in Ramsey and Mirrlees second-best environments. The polluting good tax differs from the Pigouvian tax by Ramsey terms in the first and by Stiglitz/Mirrlees plus another adjustment term in the second. These terms can be positive, negative, or zero. If preferences are weakly separable in public and private goods, with the

2 3 Optimal emission tax with pre-existing distortions

In contrast to the previous literature, this paper examines the optimal second-best environmental tax rate in the presence of pre-existing distortions by taxing emissions rather than commodities. First, by extending the general equilibrium model in the literature, we find that the ''Ramsey'' formula is different from the traditional one. Both the magnitude of the optimal emission tax rate and the welfare effects of the green tax reform depend on the stage of labor supply curve in which the labor tax is. Second, we analyze other tax systems that are not mentioned in the literature. In a tax system with an environmental tax and an abatement subsidy, the welfare effects of increasing or decreasing the two policy instruments at the same time will be negative.

Optimal Environmental Taxation from Society's Perspective

American Journal of Agricultural Economics, 2004

Much has been made recently of comparisons between the optimal environmental tax and the marginal social damage from pollution when moving from a first-best setting to a second-best setting involving distortionary taxes (Bovenberg and de Mooij, Parry, Bovenberg and Goulder). Generally speaking, the recent literature observes that results for a first-best setting may not be valid in a secondbest setting. The present analysis finds that this same general theme applies when defining social values and, in particular, when expressing the social marginal rate of substitution (MRS) between the environment and income on which the definition of marginal social damage (MSD) is based. We find that a commonly used expression for MSD involving the sum of individuals' private marginal rates of substitution between the environment and income is only equal to the social MRS at the first-best optimum. In a second-best setting with distortionary taxes, this expression is no longer equal to the social MRS and thus does not provide a consistent measure of relative values from society's perspective.

Environmental taxation with endogenous choice of environmental quality

The present paper examines the role of environmental policy in the presence of imperfect competition and endogenous quality choices, assuming environmentally conscious consumers. We compare the shortsighted policy intervention (the government takes the choice of environmental quality as given) to the second best maximization of social welfare, where the environmental tax is set taking into account both its long run effect on quality choices, as well as its short run effect on quantities. We find that ignoring long run effects leads to the introduction of less polluting product types, yet, higher environmental damage. Firms anticipate that the environmental tax will depend on their product's emissions per unit of output, and increase the environmental quality of their product in order to enjoy a lower tax rate. Total emissions increase despite the reduction in emissions/unit and social welfare decreases relative to the second best. Our results imply that a short-sighted environmental policy may induce higher environmental quality but it might also be detrimental to the environment.

Pollution taxes and standards: A continuum of quasi-optimal solutions

Journal of Environmental Economics and Management, 1983

A generalized second-best problem, involving a perfectly competitive industry which produces a pollution type of externality, is examined. The pollution tax is allowed to assume an arbitrary value (possibly zero), while a pollution standard, set as a ratio of pollution to output, is determined by a first-order optimizing condition. The general condition for a set of quasi-optimal solutions includes the Paretooptimal solution as a special case. It is also found that when the pollution tax is below the optimal level, the usual implication is that the standard should be set so that the marginal cost of pollution reduction exceeds the marginal external damage.

Optimal Environmental Tax-Subsidy Regime in the Presence of Increasing Returns

This paper develops a set of three models to study the optimal tax-subsidy regime in an economy characterised by two deviations from the perfect competition model – negative externality from pollution by the "dirty" industry, and increasing returns in the "clean" industry. Its main conclusions are: (1) the optimal single pollution tax is higher than the Pigouvian level; (2) a combination of pollution tax and quantity subsidy increases consumer welfare at a lower level of pollution tax; (3) the optimal pollution tax can be further lowered and consumer welfare further increased if the quantity subsidy is supplemented by a lump-sum subsidy.