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THE RESEARCH ON THE ECONOMIC EFFECT OF MARKET-BASED ENVIRONMENTAL POLICY INSTRUMENTS

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THE RESEARCH ON THE ECONOMIC EFFECT OF MARKET-BASED ENVIRONMENTAL POLICY INSTRUMENTS

 

 

 

Abstract

Market-based environmental policy has many forms, including carbon trade and carbon taxes. The choice of market-based environmental policy instruments needs careful consideration of the effect on economy growth and structure. In the analytical framework of Ramsey model, carbon emissions are added into the instantaneous utility function and the problem of maximization of enterprise profits. Based on this hypothesis, the balance growth path and dynamitic changes of consumption and investment could be compared under different market-based environmental policy instruments. The conclusion shows that market-based environmental policy instruments have a negative effect on economic growth in the short run. However, in the long run, these instruments can promote economic growth and optimize economic structure by giving enterprises motivation to improve emission reduction technology. The distinction of these two environmental policy instruments lies in the difference between the price of carbon emission permit and the rate of carbon taxes. Moreover, by derivation, it is obvious that saving rate is inversely linked to carbon tax rate (or the price of carbon emission permit). Therefore, according to the current situation in China’s economic development, in order to improve consumption’s contribution on economic growth, we can choose the instrument which has higher price to reduce saving rate. In this way, consumption can be promoted and the structure of economics can be optimized.

 

Keywords

Market-Based Environmental Policy Instruments, Economic Growth, Consumption, Investment, Ramsey Model