by Daniel Cook
Abstract
This paper studies the long-run effects of imposing a tax on the emissions from energy usage. We impose an endogenous tax on polluting emissions from energy use in a model where energy firms can do R&D in order to clean up their energy product. The model is an extension of that developed by Peretto (2007), who found that imposing an exogenous tax on energy could cause a long-run increase in welfare, because labor originally employed in energy production would be reallocated toward productivity enhancing R&D in manufacturing. In this paper, the emissions tax once again causes labor to be reallocated away from energy production to final goods production and R&D, but some of that R&D is emissions reducing rather than productivity enhancing. This dampens the positive long-run welfare effect, because it reduces the impact of the tax on manufacturing firms. The model does not include any preference for environmental quality: were such a preference included, the effect on welfare could instead be positive.
Professor Pietro F Peretto, Faculty Advisor
