Research Discussion Papers, Bank of Finland
No 24/2013:
On optimal emission control – Taxes, substitution and business cycles
Jussi Lintunen ()
and Lauri Vilmi ()
Abstract: This paper studies the cyclical properties of optimal
emission taxes and emissions using a real business cycle model with a stock
pollutant. We derive conditions for the procyclicality of optimal emission
tax and show that the tax is in typical conditions procyclical. The
possibility of a countercyclical behavior of the emission tax increases if
1) the pollution is short-lived and the emission transfer into
environmental damages rapidly 2) emissions are countercyclical, 3) marginal
damages are strongly increasing and 4), in disutility case, the marginal
utility of consumption increases with the increase in the intensity of the
harmful environmental process. In the climate change context we show that
the optimal carbon tax is procyclical irrespectively on the production
technology. Instead, the technology is a key determinant of the cyclicality
of the emissions. The optimal carbon tax correlates almost fully with the
consumption and as a rule-of thumb, it could be indexed to the consumption
level of the economy. The relative scale of tax deviations relative to the
consumption deviations is determined by the inverse of the intertemporal
elasticity of substitution. Comparison between the optimal emission tax and
an optimally set constant emission tax shows that the constant tax leads to
very slightly higher emissions but the general economic effects are next to
negligible.
Keywords: optimal emission tax; cyclical properties; (follow links to similar papers)
JEL-Codes: E32; Q54; Q58; (follow links to similar papers)
30 pages, October 9, 2013
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