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Environmental Policy in Good and Bad Times: The Countercyclical Effects of Carbon Taxes and Cap-and-Trade

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  • Goran Dominioni
  • Michael Faure

Abstract

‘Green recovery’ is one of the key themes of the stimulus packages implemented around the world in response to the Covid-19-related economic downturn. Recent research points to the potential role of regulation that becomes less stringent during recessions (ie countercyclical regulation) as an instrument to stimulate a quicker recovery. When this argument is put in the context of a green recovery, two key questions arise: should we implement countercyclical environmental regulation? If yes, what environmental instruments are better suited to stimulate the economy in periods of economic downturn? This article addresses these questions by discussing the risks of countercyclical environmental regulation and comparing the countercyclical effects of two critical environmental instruments: carbon taxes and cap-and-trade. The article argues that policymakers should be cautious in implementing countercyclical environmental regulation because the benefits of this practice are uncertain and it entails various risks. The article also challenges the belief common among academics and policymakers that cap-and-trade is inherently more countercyclical than carbon taxes by showing that whether this is true depends on the design of these instruments and other contingent factors.

Suggested Citation

  • Goran Dominioni & Michael Faure, 2022. "Environmental Policy in Good and Bad Times: The Countercyclical Effects of Carbon Taxes and Cap-and-Trade," Journal of Environmental Law, Oxford University Press, vol. 34(2), pages 269-286.
    • Handle: RePEc:oup:envlaw:v:34:y:2022:i:2:p:269-286.
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    File URL: http://hdl.handle.net/10.1093/jel/eqac003
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    Citations

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    Cited by:

    1. Barbara Annicchiarico & Marco Carli & Francesca Diluiso, 2022. "Climate Policies, Macroprudential Regulation, and the Welfare Cost of Business Cycles," CEIS Research Paper 543, Tor Vergata University, CEIS, revised 31 Oct 2022.
    2. Alexander Mechanick & Jacob P. Weber, 2024. "The Countercyclical Benefits of Regulatory Costs," Staff Reports 1109, Federal Reserve Bank of New York.
    3. Muth, Daniel, 2023. "Pathways to stringent carbon pricing: Configurations of political economy conditions and revenue recycling strategies. A comparison of thirty national level policies," Ecological Economics, Elsevier, vol. 214(C).

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