Optimal fiscal policy with environmental tax and pollution-abatement spending in a model with utility-enhancing environmental quality: lessons from Bulgaria

This paper characterized optimal fiscal policy - with environmental taxes, and public spending on abatement - in the presence of pollution, and evaluated it relative to the exogenous (observed) one in Bulgaria, an economy with a largely unreformed and polluting industry. The results are evaluated in light of the optimal environmental taxation of dirty production and the optimal spending on abatement, and the effect of those fiscal measures on the utility-enhancing environmental quality. To this end, a dynamic general-equilibrium model is calibrated to Bulgarian data (1999-2016). The main findings from the computational experiments performed are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides twenty percent higher utility-enhancing environmental quality; (iii) The optimal level of carbon taxes is almost three times higher, and the optimal level of abatement spending is six times higher; (iv) The optimal steady-state consumption tax is twice lower.