The Political Economy of Environmental Policy with Overlapping Generations
Climate Change and Environment Seminar Series: Summer Term
A two-sector OLG model illuminates previously unexamined intergenerational effects of a tax that protects an environmental stock. A traded asset capitalises the economic returns to future tax-induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit from the tax-induced improvement in environmental stock. The principal intergenerational conflict arising from public policy is between generations alive at the time society imposes the policy, not between generations alive at different times. A Pareto-improving policy can be implemented under various political economy settings.
Paper: ‘The political economy of environmental policy with overlapping generations‘ by Larry Karp and Armon Rezai (PDF, 368KB)