Essays on Environmental Policy Instruments, Emissions Leakage and Public Policy

This dissertation consists of three essays related to my research on environmental policy, emissions leakage, and public policy. In the first essay, I address how open economies respond to environmental policy instruments under uncertainty. I develop a dynamic stochastic general equilibrium model for a small open economy (SOE) and evaluate the macroeconomic fluctuations in response to cap-and-trade, pollution tax, and emissions intensity standard under two shocks: productivity and terms of trade. My findings suggest that cap-and-trade policies are most effective in dampening the macroeconomic volatility from productivity shock. However, under the terms-of-trade shock, pollution tax, and intensity target policies are as effective as the cap-and-trade policies in reducing the macroeconomic volatility of consumption and employment. The second essay addresses the effects of a general fall in service trade costs on emissions leakage. I develop a two-good (manufacturing and services) general equilibrium model of a SOE to evaluate emissions leakage from an emissions tax increase. Under free trade in manufacturing and no trade in services, no leakage occurs. Allowing for trade in services, a positive leakage is driven by income, output and terms-of-trade effects. Calibrating the model to the Canadian macroeconomic data, I find that the emissions leakage is about 18 % lower when using trade friction levels estimated from the literature rather than assuming no trade frictions in services. In the third essay, using a data panel for American states from 1987 to 2010, I evaluate the effects of rainy day funds (RDFs) on state gross domestic product (GDP). RDFs are intended to smooth taxes and spending to alleviate fiscal stress during recessions. While RDFs are not intended to affect the business cycle, they may do so through fund accumulation during periods of economic expansion and through fund disbursement during periods of economic contraction. Using an Arellano-Bond estimator, I find that the RDF's average output multiplier is about l.5. The multiplier during recessionary periods is about 3.4 and during election years is as big as in recessionary periods.