Abstract
In a standard static setup, optimal environmental taxes are increasing in expected pollution damage. With irreversible investments and new information about environmental damage becoming available over time, we show that this result also holds if damage in the high-damage scenario rises or the probability of high damage increases. However, if damage in the low-damage scenario increases, current environmental taxes should decrease if firms face sufficiently similar abatement costs.
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Dijkstra, B.R., van Soest, D.P. Higher Pollution Damage, More Lenient Environmental Policies?. J Econ 89, 267–284 (2006). https://doi.org/10.1007/s00712-006-0223-5
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DOI: https://doi.org/10.1007/s00712-006-0223-5