Optimal Environmental Policy in a Small Open Economy Under a New Keynesian Framework
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This paper analyzes the optimal environmental policy under the new Keynesian environment. First, this paper conducts an empirical analysis using panel VAR. The results show that a 10% reduction in carbon dioxide is associated with a 2% reduction in GDP. To build a theoretical model, we next model the impact of the environment on economic activity in a small open economy and analyze the impact of environmental policies under a new Keynesian model. The results are as follows. First, optimized taxation should respond strongly to emissions and output since the emission is procyclical and firms’ abatement efforts are procyclical, dampening business cycle fluctuations. Second, environmental taxation should be levied on domestic emission flows, not the overall stock of emissions, since it is more efficient and likely to generate less macroeconomic volatility by inducing firms to reduce emissions and optimally adjust their activities over time. Finally, the simple optimized environmental taxations show that the environmental taxation policy should be aggressive and not tax-smoothing type since the so-called tax-smoothing policy is welfare detrimental.
Abstract
This paper analyzes the optimal environmental policy under the new Keynesian environment. First, this paper conducts an empirical analysis using panel VAR. The results show that a 10% reduction in carbon dioxide is associated with a 2% reduction in GDP. To build a theoretical model, we next model the impact of the environment on economic activity in a small open economy and analyze the impact of environmental policies under a new Keynesian model. The results are as follows. First, optimized taxation should respond strongly to emissions and output since the emission is procyclical and firms’ abatement efforts are procyclical, dampening business cycle fluctuations. Second, environmental taxation should be levied on domestic emission flows, not the overall stock of emissions, since it is more efficient and likely to generate less macroeconomic volatility by inducing firms to reduce emissions and optimally adjust their activities over time. Finally, the simple optimized environmental taxations show that the environmental taxation policy should be aggressive and not tax-smoothing type since the so-called tax-smoothing policy is welfare detrimental.
참고문헌 (14)
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