TY - JOUR
T1 - Does a Recession Call for Less Stringent Environmental Policy? A Partial-Equilibrium Second-Best Analysis
AU - van den Bijgaart, Inge M.
AU - Smulders, Sjak
N1 - Publisher Copyright:
© 2017, Springer Science+Business Media B.V.
PY - 2018/8/1
Y1 - 2018/8/1
N2 - This paper analyses second-best optimal environmental policy responses to real and financial shocks in a two-period partial equilibrium model with heterogeneous firms, an environmental externality, and credit constraints. We show that, to alleviate credit constraints and encourage investment, the second-best optimal emission tax falls short of marginal emission damages. The optimal response to shocks depends on how the shock affects the size of the environmental and credit market failures and the effectiveness of the tax in alleviating these market failures. Under mildly restrictive assumptions on functional forms, the optimal response to a (persistent) negative productivity shock or a tightening of credit is to reduce the emission tax. Our results are informative for how climate change policy should optimally change with the business cycle.
AB - This paper analyses second-best optimal environmental policy responses to real and financial shocks in a two-period partial equilibrium model with heterogeneous firms, an environmental externality, and credit constraints. We show that, to alleviate credit constraints and encourage investment, the second-best optimal emission tax falls short of marginal emission damages. The optimal response to shocks depends on how the shock affects the size of the environmental and credit market failures and the effectiveness of the tax in alleviating these market failures. Under mildly restrictive assumptions on functional forms, the optimal response to a (persistent) negative productivity shock or a tightening of credit is to reduce the emission tax. Our results are informative for how climate change policy should optimally change with the business cycle.
KW - Credit constraints
KW - Credit shock
KW - Productivity shock
KW - Second-best optimal emission tax
UR - http://www.scopus.com/inward/record.url?scp=85026908328&partnerID=8YFLogxK
U2 - 10.1007/s10640-017-0157-0
DO - 10.1007/s10640-017-0157-0
M3 - Article
AN - SCOPUS:85026908328
SN - 0924-6460
VL - 70
SP - 807
EP - 834
JO - Environmental and Resource Economics
JF - Environmental and Resource Economics
IS - 4
ER -