TY - JOUR

T1 - Stochastic environmental policy, risk-taking, and growth

T2 - Discretion versus commitment

AU - Soretz, Susanne

PY - 2004/1/1

Y1 - 2004/1/1

N2 - This paper analyses the question of whether discretionary environmental policy or binding policy rules are more capable of promoting individual abatement activity. An endogenous growth model is considered where pollution is essential for production and causes disutility. Accidental pollution introduces uncertainty into the model. Furthermore, the extent to which the agents perceive their individual influence on aggregate pollution is parameterised. Recursive preferences allow for the separation between inter-temporal substitutability and risk aversion. Two different environmental policy regimes are distinguished: a stochastic pollution tax is compared with a pure deterministic tax regime. For a sufficiently volatile pollution tax and a sufficiently low elasticity of inter-temporal substitution, discretionary environmental policy is shown to be more efficient than commitment to policy rules. Due to the motive for precautionary savings, an unpredictable pollution tax may lead to more abatement effort than an environmental policy that is known with certainty in advance.

AB - This paper analyses the question of whether discretionary environmental policy or binding policy rules are more capable of promoting individual abatement activity. An endogenous growth model is considered where pollution is essential for production and causes disutility. Accidental pollution introduces uncertainty into the model. Furthermore, the extent to which the agents perceive their individual influence on aggregate pollution is parameterised. Recursive preferences allow for the separation between inter-temporal substitutability and risk aversion. Two different environmental policy regimes are distinguished: a stochastic pollution tax is compared with a pure deterministic tax regime. For a sufficiently volatile pollution tax and a sufficiently low elasticity of inter-temporal substitution, discretionary environmental policy is shown to be more efficient than commitment to policy rules. Due to the motive for precautionary savings, an unpredictable pollution tax may lead to more abatement effort than an environmental policy that is known with certainty in advance.

KW - Discretionary policy

KW - Endogenous growth

KW - Perception

KW - Pollution

KW - Recursive preferences

KW - Stochastic endogenous growth

KW - Stochastic pollution

KW - Tax shock

KW - Taxation

KW - Uncertainty

KW - Environmental Governance

UR - http://www.scopus.com/inward/record.url?scp=8644248102&partnerID=8YFLogxK

U2 - 10.1504/ijgenvi.2004.005284

DO - 10.1504/ijgenvi.2004.005284

M3 - Journal articles

AN - SCOPUS:8644248102

VL - 4

SP - 58

EP - 72

JO - International Journal of Global Environmental Issues

JF - International Journal of Global Environmental Issues

SN - 1466-6650

IS - 1-3

ER -