Emissions Pricing Policies and Business Cycles: Fixed vs. Variable Tax Regimes

Authors

Fariba Ramezani, University of WollongongFollow
Charles Harvie, University of WollongongFollow
Amir Arjomandi, University of WollongongFollow

RIS ID

139840

Publication Details

Ramezani, F., Harvie, C. & Arjomandi, A. (2019). Emissions Pricing Policies and Business Cycles: Fixed vs. Variable Tax Regimes. The Australian Economic Review, Online First 1-17.

Abstract

As by-products, emissions follow economic fluctuations. Ignoring this fact in environmental policies can lead to unexpected emissions fluctuations and an increase in intervention costs. Using a real business cycle model, we compare two policies: a fixed tax policy where the price is constant over time and a variable tax regime where the tax rate is set at the beginning of each period. We find that while both programs result in lower emissions, a variable tax regime is preferable since first, it can ensure that the maximum welfare is always achieved, and second, it is more effective in stabilising emissions.