Market-based instruments as mitigating tools of the environmental externality: case od CO2/energy taxation in Europe
2009
Ouraich, I.
The social planner's objective of maximizing the social welfare and the firms' optimization behavior represented by the profit maximization in the competitive market shaped the framework followed in this piece of research which intended to derive the emission function. The theoretical model employed relies on three main factors: regulator, market and technology. This research attempted to shed light on the effect of the environmental taxation rate (specifically, CO2/energy taxation) as a regulator instrument directed toward correcting the negative environmental externality, and where output, labor wage, interest rate, and energy prices represent the market and the trend term represents the effect of technical change. The emission function was estimated using data for CO2 emissions at the country level for a pool of European countries for the period 1990-2005. The CO2 tax was examined implicitly through its effect on energy prices, where we estimated the partial elasticity using the Least Squares method. The conclusion of the study was that environmental taxation through its price mechanism and technical change negatively affects emissions (higher taxes yielding lower emissions), whereas output has a positive effect.
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