Pollution Permits, Green Taxes, and the Environmental Poverty Trap

We compare pollution permits and green taxes in a unified overlapping generations model with endogenous longevity. The model identifies pollution permits as a potential source of multiple equilibria. One nontrivial equilibrium is an environmental poverty trap (EPT) with low capital and a high stock of pollution. An economy operating around the equilibrium will gravitate toward this equilibrium in the long run. The other nontrivial equilibrium is a desirable one with high capital and a low stock of pollution. A saddle path leads to this desirable equilibrium. Alternatively, green taxes produce a unique stable equilibrium that avoids the EPT. Our conclusion is that developing countries can continue to consider pollution permits as an efficient mechanism to improve environmental conditions but proceed with caution given the possibility of being drawn into an EPT. * Department of Economics, University of Wyoming, 1000 E. University Avenue, Laramie, WY 82070. Email: [email protected]. Phone: (307) 766-4931.