Uncertainty over future environmental taxes: Impact on current investment in resource conservation

Bruce A. Larson, George B. Frisvold

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

Besides static efficiency properties, environmental policies should be evaluated in terms of their longer-run impacts on investment and technological change to reduce pollution and degradation of natural resources. Using a stochastic dynamic programming approach, this paper analyzes how uncertainty about a future environmental tax on a polluting input alters investment in resource conservation and how such investment affects future demand for the polluting input. The impact on investment depends crucially on price elasticities of demand and on the manner in which investment shifts and rotates the demand schedule for the polluting input in the future. The expectation of a higher tax does not necessarily create stronger incentives for investment in resource conservation. More uncertainty about future policies does encourage investment if it makes a firm more responsive to future price changes and discourages investment if it makes a firm less responsive to price changes.

Original languageEnglish (US)
Pages (from-to)461-471
Number of pages11
JournalEnvironmental and Resource Economics
Volume8
Issue number4
DOIs
StatePublished - Jan 1 1996
Externally publishedYes

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Keywords

  • environmental tax
  • policy uncertainty
  • sequential investment

ASJC Scopus subject areas

  • Economics and Econometrics
  • Management, Monitoring, Policy and Law

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