Essays on interactions between environmental and fiscal policies: analytical and numerical general equilibrium analyses

This dissertation is a collection of three essays investigating issues related to environmental fiscal policy and the economy. It focuses on the design and efficiency of market-based environmental regulatory policies under different circumstances, including policy interactions, uncertainty, and endogenous public incentives for technical change. Each essay develops a theoretical or empirical general equilibrium model to study a specific type of policy interaction that affects environmental quality, economic growth, and welfare in a world with other prior distortions. The first essay extends the literature on the ‘double dividend’ hypothesis and market-based instrument choice to evaluate the welfare implications of environmental taxes and quotas that apply to polluting intermediate inputs in the presence of other distortionary taxes. It analyzes a static general equilibrium model with non-separable preferences and technology, relatively rare assumptions in this literature, and then establishes more generalized second-best optimal rules for environmental regulation in a world with pre-existing tax distortions. The second essay develops a dynamic model of endogenous growth, based on the joint accumulation of private capital and abatement knowledge. It extends previous models to allow for distortionary income taxes for financing both nonproductive government spending and public investment in abatement knowledge, focusing on a general treatment of the interactions among sustainable economic growth, the environment, and public finance in a second-best world with distortionary taxes. In this setting, the essay analyzes optimal environmental and fiscal policy rules, and also examines the growth and welfare effects of a tighter environmental policy for sustainable development. The third essay is a step toward the merger of optimal control models with dynamic CGE models. It demonstrates the usefulness of CGE techniques in control theory application and provides a practical guideline to policymakers in this relatively new field. Moreover, it explores the link between economic stabilization and optimal environmental fiscal policy design in a stochastic dynamic general equilibrium framework. Uncertainty, short-term quantity adjustment process, and sector-specific political preferences (e.g., more stabilization priorities on polluting industries) are taken into account in exploring what time paths of adjustments of the economy would be optimal for the government with explicit policy goals.