On the significance of pre-existing distortions for the costs of environmental regulation

Abstract

Recently, several papers have shown that environmental taxes are more costly in an economy with preexisting distortions than in an undistorted economy. This result applies for equal percent reductions from different emission levels. We investigate the introduction of a common target emission level in such economies, and find that the restriction reduces the initial efficiency-difference between the economies; the two solutions may even coincide. Thus, it is less costly to achieve a target for environmental quality in the distorted economy. Our result complements the above-mentioned conclusions on environmental policy in economies with and without preexisting distortions.