Environmental Funds,Public Abatement,and Welfare

This paper addresses some features of environmental funds that the government uses to finance public abatement with pollution tax revenue or tariff revenue. I find that when the pollution tax rate and the tariff rate are jointly chosen optimally, then the optimal pollution tax rate is higher than the Pigouvian tax rate under public abatement financed by tariff revenue, and lower when public abatement is financed by pollution tax revenue. Furthermore, I show that the optimal tariff rate is positive regardless of which tax revenue is used to finance public abatement. These results are relevant for countries where the government seeks revenues earmarked for the financing of environmental funds.