Green taxes, the environment, and the economy: A theoretical analysis using an overlapping generations model with endogenous longevity

Abstract

Green taxes are designed to mitigate the environmental pollution that causes millions of premature deaths worldwide each year. Using an overlapping generations (OLG) model with endogenous longevity, we examine how environmental conditions influence the effectiveness of green taxes. A key endogenous mechanism links changes in environmental quality to the economy through health effects, shaping the policy–environment boundaries for dynamics and output maximization. The model predicts that regions with low environmental carrying capacity (ECC) and low green tax rates will experience environmental and economic cycles, leading to intergenerational inequality, and fail to maximize output. These cycles can be avoided, and output maximized, if such regions raise their green tax rates. By contrast, in regions with higher ECC, the green tax rate that maximizes output may not eliminate cycles. Our findings provide insights into two dimensions of compatibility: (1) the alignment between policy stringency and environmental conditions, and (2) the compatibility of policy objectives aimed at eliminating cycles and maximizing output.