| By: |
Elettra Agliardi (Department of Economics, University of Bologna and Rimini Center for Economic Analysis);
Luigi Sereno (Department of Economics, University of Bologna) |
| Abstract: |
The effects of four environmental policy options for the reduction of
pollution emissions, i.e. taxes, emission standards, auctioned permits and
freely allocated permits, are analyzed. The setup is a real option model where
the amount of emissions is determined by solving the firm's profit
maximization problem under each policy instrument. The regulator solves an
optimal stopping problem in order to find the critical threshold for policy
adoptions taking into account revenues from taxes and auctioned permits and
government spending. In this framework, we find the ranking of the alternative
policy options in terms of their adoption lag and social welfare. We show that
when the output demand is elastic emission standards are preferred to freely
allocated permits. Taxes and auctioned permits are always equivalent in terms
of their adoption lag and social welfare and also equivalent to emission
standards when the regulator redistributes revenues. |
| Keywords: |
Environmental policies; Taxes; Emission standards; Permits; Public abatement spending; Optimal implementation time; Real options |
| JEL: |
Q28 Q L51 H23 |
| Date: |
2011–12 |
| URL: |
http://d.repec.org/n?u=RePEc:rim:rimwps:53_11&r=res |