Abstract
In many industries firms affect the environment in two distinct types of ways. Firstly they emit routine, anticipated volumes of “flow pollutants”, secondly they can potentially inflict catastrophic environmental damage, liability for which may be overhanging or limited by the law. Operaters of chemical plants, nuclear power stations and oil tankers are three examples. If an emissions tax or charge is to be levied on the flow pollutants in these cases how should it be set? We use simple dynamic-programming techniques to characterise second-best optimality. We identify contexts in which the tax should be raised above its Pigovian level to take account of the catastrophic potential, and others where it should be set below that level. The analysis has significant implications for how policymakers should go about calibrating “ecological taxes” in a number of high profile industries.
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I would like to thank Dennis Snower, Sandeep Kapur, Catherine Liston, Robert Cairns, Ngo van Long, two referees of this journal and seminar participants at the University of London and McGill University in Montreal, for useful comments on an earlier draft. All errors are mine.
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Heyes, A.G. Optimal taxation of flow pollutants when firms may also inflict catastrophic environmental damage. Environ Resource Econ 7, 1–14 (1996). https://doi.org/10.1007/BF00420424
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DOI: https://doi.org/10.1007/BF00420424