Designing Efficient Policies in Terms of Economic and Environmental Objectives

The aim of this chapter is to determine efficient policies in terms of economic and environmental objectives. Efficiency is a particularly desirable property for policies when taking into account environmental concerns, since, on the one hand, any environmental policy will be better accepted if it does not imply big economic costs and, on the other hand, economic targets should be pursued with the minimum environmental impact. First, we present a two-objective problem, assuming that the government is only concerned about increasing economic growth and reducing CO2 emissions. We conclude, as expected, that tougher environmental goals monotonically entail higher environmental tax rates. Indeed, if we want to cut down emissions by more than 1%, the model recommends setting the tax rate at its highest feasible value. Afterwards, we design a more complex and more realistic exercise by including additional economic objectives such as unemployment, public deficit and fiscal pressure. We find that there are some trade-offs across objectives which are by no means straightforward or even monotonic. The conclusion is that economic growth on its own cannot be considered as a sufficient indicator of all economic policy concerns, and a more accurate analysis requires explicitly including all key indicators.