The cost-effectiveness of alternative instruments for environmental protection in a second-best setting

This paper employs analytical and numerical general equilibrium models to e xamine the significance of pre-existing factor taxes for the costs of pollu tion reduction under a wide range of environmental policy instruments. Pre- existing taxes imply significantly higher abatement costs for every instrum ent considered, but the cost-impact of such taxes differs sharply across in struments. Prior taxes can eliminate the cost-advantage of market-based ins truments (emissions taxes and permits) over technology mandates or performa nce standards, particularly if the former policies fail to generate revenue s and use the revenues to finance cuts in the prior distortionary taxes. Th e cost differences between instruments are highly sensitive to the extent o f pollution abatement: for most policies, abatement costs converge to the s ame value as pollution abatement approaches 100 percent. (C) 1999 Elsevier Science S.A. All rights reserved.