Working Paper: NBER ID: w20334
Authors: Don Fullerton; Daniel H. Karney
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: No keywords provided
JEL Codes: H23; Q48; Q53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| carbon tax (H23) | CO2 emissions (Q54) |
| carbon tax (H23) | SO2 emissions (L94) |
| tax-permit scenario (H26) | CO2 emissions (Q54) |
| tax-permit scenario (H26) | SO2 emissions (L94) |
| taxtax scenario (H20) | welfare (I38) |
| tax-permit scenario (H26) | welfare (I38) |
| regulatory framework governing SO2 (L59) | welfare gains (D69) |
| general equilibrium effects (D50) | quantity of second pollutant (Q53) |
| binding permit policy for SO2 (Q58) | welfare (I38) |