Effects of carbon taxes in an economy with large informal sector and rural-urban migration

I build an equilibrium search and matching model of an economy with an informal sector and rural urban migration to analyze the effects of budget-neutral green tax policy (raising pollution taxes, while cutting payroll taxes) on the labor market. The key results of the paper suggest that when general public spending varies endogenously in response to tax reform and higher energy taxes can reduce the income from self-employed work in the informal sector, green tax policy can produce a triple dividend: a cleaner environment, lower unemployment rate and higher after-tax income of the private sector. This is due to the ability of the government, by employing public spending as an additional policy instrument, to reduce the overall tax burden when an increase in energy tax rates does not exceed some threshold level. Thus governments should employ several instruments if they are concerned with labor market implications of green tax policies

Optimal fiscal policy and different degrees of access to international capital markets

Empirically, the cyclical pattern of scal policy differs between developed and developing countries, with in particular much greater pro-cyclicality and volatility of public investment in developing countries. In this paper I provide a theoretical explanation for the observed differences by analyzing optimal fiscal policy under different degrees of access to world capital markets. If the supply of foreign capital is elastic, as in a developed country, then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption. If the supply of foreign capital is inelastic, however, as in a developing country, the optimal adjustment policy is to reduce public investment (by much more than public consumption) and to raise consumption taxes

Inflation persistence and exchange rate regime: implications for dynamic adjustment to shocks in a small open economy

The paper examines implications of ination persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under ination targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustment paths are slow and cyclical if there is a signicant backward-looking element in the inflation dynamics and the exchange rate isfixed. It is also shown that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in the economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped. In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smooth response of the real exchange rate

The price vs quantity debate: climate policy and the role of business cycles

What is the optimal instrument design and choice for a regulator attempting to control emissions by private agents in face of uncertainty arising from business cycles? In applying Weitzman's result [Prices vs. quantities, Review of Economic Studies, 41 (1974), 477-491] to the problem of greenhouse gas emissions, the price-quantity literature has shown that, under uncertainty about abatement costs, price instruments (carbon taxes) are preferred to quantity restrictions (caps on emission), since the damages from climate change are relatively at. On the other hand, another recent piece of academic literature has highlighted the importance of adjusting carbon taxes to business cycle uctuations in a procyclical manner. In this paper, we analyze the optimal design and the relative performance of price versus quantity instruments in the face of uncertainty stemming from business cycles. Our theoretical framework is a general equilibrium real business cycle model with a climate change externality and distortionary scal policy. First, we nd that in an innitely exible control environment, the carbon tax uctuates very little and is approximately constant, whilst emissions uctuate a great deal in response to a productivity shock. Second, we nd that a xed price instrument is advantageous over a xed quantity instrument due to the cyclical behavior of abatement costs, which tend to increase during expansions and decline during economic downturns. Our results suggest that the carbon tax is approximately constant over business cycles due to \at" damages in the short-run and thus procyclical behavior as suggested by other studies cannot be justied merely on the grounds of targeting the climate externality

Characterising green employment: the impacts of ‘greening’ on workforce composition

This paper estimates the share of jobs in the US that would benefit from a transition to the green economy, and presents different measures for the ease with which workers are likely to be able to move from non-green to green jobs. Using the US O*NET database and its definition of green jobs, 19.4% of US workers could currently be part of the green economy in a broad sense, although a large proportion of green employment would be ‘indirectly’ green, comprising existing jobs that are expected to be in high demand due to greening, but do not require significant changes in tasks, skills, or knowledge. Analysis of task content also shows that green jobs vary in ‘greenness', with very few jobs only consisting of green tasks, suggesting that the term ‘green’ should be considered a continuum rather than a binary characteristic. While it is easier to transition to indirectly green rather than directly green jobs, greening is likely to involve transitions on a similar scale and scope of existing job transitions. Non-green jobs generally appear to differ from their green counterparts in only a few skill-specific aspects, suggesting that most re-training can happen on-the-job. Network analysis shows that the green economy offers a large potential for short-run growth if job transitions are strategically managed

To build or not to build? capital stocks and climate policy∗

We investigate (i) the impact of emission reduction policy on investment in polluting infrastructure, such as coal-fired power stations and (ii) optimal subsidies for “clean” alternatives with “learning” spillovers. We build a general theoretical model, and embed it in a fully calibrated integrated assessment model. Because emission reduction policy reduces investments in polluting assets, short-term emission reductions are enhanced—our “irreversibility effect”. Thus, “stranded assets” in this fuel-using sector have distinctive properties. We also provide a simple formula for how the optimal subsidy to deployment of a “clean” sector depends on its rate of “learning-by-doing” and on its socially-optimal growth. So, if the sector should grow faster for other reasons, its optimal subsidy is increased, showing that its optimal growth rate is faster still—our “acceleration effect”. Our calibrations show that, to limit global climate change to 2○C warming, investments in coal-fired power stations must end very soon. Considering second-best settings, we show that carbon taxes achieve stringent policy targets more efficiently, but subsidies to the “clean” sector deliver higher welfare, and are more efficient, when policy targets are more mild

To build or not to build? Capital stocks and climate policy

Applying climate policy in practice means considering capital stocks: some assets will pro¬duce pollution whenever they are used, and some will not. Therefore long-term abatement plans should influence current investment. Moreover, newer technologies exhibit learning-by-doing in the deployment of associated infrastructure. We investigate these ideas from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our "irreversibility effect". We also show that the optimal innovation subsidy increases with the deployment rate: our "acceleration effect". Considering second-best settings, we show that, although carbon taxes achieve stringent policy targets more efficiently, subsidies to the "renewables" sector deliver higher welfare when policy targets are more mild. Revised February 201

The effects of land use regulation on deforestation: evidence from the Brazilian Amazon

To reduce deforestation rates in the Amazon, Brazil established in the period 2004-2010 conservation zones covering an area 1.5 times the size of Germany. In the same period, Brazil experienced a large reduction in deforestation rates. By combining satellite data on deforestation with data on the location and timing of the conservation zones, we provide spatial regression discontinuity estimates and difference-in-difference estimates indicating that the policy cannot explain the large reduction in deforestation rates. The reason is that the zones are located in areas where agricultural production is likely to be unprofitable. We also provide evidence that zones reduce deforestation if the incentives for municipalities to reduce deforestation are high. We rationalize these finding with a spatial economics model of land use, with endogenous location of conservation zones and imperfect enforcement. Our findings point to the need for other explanations than the conservation zones to explain the sharp decline in deforestation rates in the Brazilian Amazon since 2004