Environmental Tax Reform and Economic Welfare

Abstract

According to a new study EPI (2012), India has the worst air pollution in the entire world. Given the severe damages caused by air pollution, it is important to explore various options to control air pollution. In chapter 1, I use a computable general equilibrium (CGE) model to show that a Pigouvian tax on the use of fossil fuels with cuts in existing distortionary taxes could have double dividend in India. In addition, the fuel tax policy is also progressive. Alternative Pigouvian tax on output of pollution intensive commodities has a positive effect on economic growth, but it achieves only a modest reduction in air pollution. This tax policy does not have a significant distributive impact.