Measuring Regulatory Errors from Environmental Policy Uncertainty

We examine an environmental policy which may be revisited by a new administration. We allow for pollution to be persistent over time and for uncertainty in next period's environmental policy. When pollution is non-persistent, we show that regulatory uncertainty is inconsequential for output, pollution, or emission fees. However, when pollution is persistent, we find that a more likely reelection of an stringent administration has the unintended (positive) consequence of reducing current pollution. We also measure the inefficiencies stemming from ignoring pollution persistence and from policy uncertainty, identifying in which contexts they are severe or negligible