Environmental policy in dynamic models: The impact of the elasticity of substitution if consumers pollute

This paper discusses first results of a comparative study of different environmental policy instruments. In a model with pollution as a side effect of consumption different environmental policies are studied. In simulations we observe the dynamic behavior of models with utility functions of the Leontief, CES, and Cobb-Douglas type. Environmental policy is modeled as a consumption tax. Tax revenues are used to pay a subsidy for environment-friendly activities, are reimbursed as lump-sum payments or vanish. Furthermore we investigate the implications of errors in the choice of instruments.