Abstract
We examine an environmental policy which may be revisited by a new administration. We allow for pollution to be persistent over time and for uncertainty in next period's environmental policy. When pollution is non-persistent, we show that regulatory uncertainty is inconsequential for output, pollution, or emission fees. However, when pollution is persistent, we find that a more likely reelection of a stringent administration has the unintended (positive) consequence of reducing current pollution. We also measure the inefficiencies stemming from ignoring pollution persistence and from policy uncertainty, identifying in which contexts they are severe or negligible.
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Notes
Baker et al. (2013) propose a policy uncertainty index as a weighted average of: (1) a count of newspaper articles containing key terms related to policy uncertainty (this is the element receiving the highest weight on the index);
(2) the dollar impact of tax provisions set to expire in the near future (as a measure of uncertainty about future changes in the tax code); and (3) dispersion in economic forecasts of the CPI and government spending (as a proxy for uncertainty about fiscal and monetary policy).
Svensson et al. (2009) analyze an optimization model considering different types of uncertainty, such as future energy prices or policy instruments, and examine investments decisions in energy efficiency. However, they do not consider evaluate the inefficiencies from ignoring pollution persistence or policy uncertainty.
Our setting considers linear demand and production costs, and convex environmental damages, which are standard assumptions in the literature analyzing environmental regulation in oligopolistic industries, such as Poyago-Theotoky (2007), Ouchida and Goto (2014), Lambertini et al. (2017), and Haruna and Goel (2018); among others.
In particular, \({{\pi }_{i}(t}_{k}^{*})\) is decreasing in \(\alpha \) and \(X\) if and only if \({d}_{k}>\frac{1-c}{2\left(1-c\right)+4\alpha X}\), which holds since \({d}_{k}>1/2\) by definition.
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We would like to thank the editor, Menahem Spiegel, and reviewers for their helpful suggestions, and Georges Zaccour and Li-Hsien Hank Chien for their insightful comments. We are also grateful to seminar participants at the 15th Western Economic Association International conference in Tokyo, HEC Montreal, and Washington State University.
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Espinola-Arredondo, A., Munoz-Garcia, F. & Garrido, D. Measuring regulatory errors from environmental policy uncertainty. J Regul Econ 64, 48–65 (2023). https://doi.org/10.1007/s11149-023-09464-z
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DOI: https://doi.org/10.1007/s11149-023-09464-z