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Environmental and Resource Economics

, Volume 8, Issue 4, pp 399–416 | Cite as

Choosing the right instrument

The role of public revenues for environmental policy
  • Ronnie Schöb
Original Paper

Abstract

This paper analyses the optimal choice of second-best optimal environmental policies. Using a partial equilibrium model, the paper first reconfirms the well-known result that the existence of a double dividend (in its weak definition) favours environmental policy instruments which maximise tax revenues for a given improvement in environmental quality. Additional revenues can be used to reduce the distortion of existing taxes such as taxes on labour and capital income. Without uncertainty, environmental taxes and auctioned permits are equally appropriate. In the presence of uncertainty, however, the optimal choice of taxes or tradable permits depends on the relative magnitudes of the marginal environmental damage and the marginal benefit from consuming a polluting good. In the second part, the paper, therefore, analyses how the revenue capacity affects the optimal choice of environmental policy instruments in the presence of uncertainty. The paper shows that the first-best choice rule between price and quantity regulation (Weitzman, 1974) remains valid in a second-best world with distortionary taxation.

Key words

environmental taxes tradable permits excess burden tax revenues uncertainty secondbest policy 

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Copyright information

© Kluwer Academic Publishers 1996

Authors and Affiliations

  • Ronnie Schöb
    • 1
  1. 1.Department of EconomicsUniversity of MunichMunichGermany

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