Symposium on Public Finance and the Environment

By Aronsson, Thomas | Public Finance and Management, April 1, 2010 | Go to article overview

Symposium on Public Finance and the Environment


Aronsson, Thomas, Public Finance and Management


ABSTRACT

This short paper summarizes the contributions to the special is-sue entitled "Public Finance and the Environment".

INTRODUCTION AND SUMMARY OF PAPERS

There is a rapidly growing literature where research questions in Public Economics and Environmental Eco-nomics interact. One of the basic ideas here is to use the Public Economics "toolbox" to address environmental problems and public policies to alleviate them. This is also the topic of the current special issue, entitled "Pub-lic Finance and the Environment", which contains six articles. Taken together, these articles cover a variety of issues in Public and Environmental Economics, such as environmental taxation, subsidies to environment-friendly behavior, voluntary contribution to public goods, relationships between moral motivation and eco-nomic incentives, fiscal federalism aspects of environ-mental policy, and international climate agreements.

The first paper, written by Albrecht Bläsi and Till Requate, deals with public policy that serves both to alleviate environmental externalities and support envi-ronment-friendly technologies. More specifically, the basic question is whether governments ought to subsid-ize the production of clean energy; an issue which has been debated recently as policy makers worry about the incentives facing the producers of clean energy. The authors develop a model with two types of electricity producers: fossil fuels utilities generating emissions and suppliers of electricity from a clean renewable resource exemplified by wind power. There is also production of wind power turbines (bought and used by the producers of wind power), which is characterized by learning-by-doing. Therefore, if learning contains a common ele-ment, i.e. if it is not purely private, there will be exter-nalities in addition to the environmental externality generated by fossil fuels energy. As a benchmark, the authors examine the policy instruments that would al-low the government to implement the first best resource allocation. If learning is purely private, the first best can be implemented solely by using a Pigouvian emission tax. With learning spillovers, the Pigouvian emission tax ought to be supplemented by two subsidies: directed at the output and market entry, respectively, for turbine producers. Therefore, if the government were equipped with the policy instruments mentioned above, there would be no need for subsidies directed at the produc-tion of renewable energy. Without these instruments, on the other hand, a subsidy directed at the production of renewable energy may have a corrective role to play, as it constitutes an indirect instrument for influencing the externalities from environmental damage and learning. The basic question is then how the government ought to use this subsidy in an optimal way to balance the incen-tive effects associated with several simultaneous market failures.

While aiming at improving the natural environment, many countries also suffer from high and persistent rates of unemployment. As a consequence, it is impor-tant to analyze whether certain policies simultaneously may lead to a cleaner environment and lower unem-ployment. The second paper, written by Ronnie Schöb, deals with environmental policy - motivated by concern for climate change - in an economy characterized by involuntary unemployment. Such economies are often exemplified by European countries, where trade-unions have been influential actors in the labor markets for a long time. The basic question in the paper is whether the additional revenue generated by environmental poli-cy allows the government to reap an additional dividend in terms of increased employment; for instance, by in-creasing the labor demand via lower labor taxes. How-ever, as international climate agreements typically imp-ly that many resource importing countries tighten their environmental policy simultaneously, the suppliers' (e.g., oil suppliers') responses may influence the public revenue that each signatory is able to raise: a second dividend can be realized only if the resource importing countries use the environmental policy instruments in a way that allows them to raise public revenue. …

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