Using analytical and numerical general equilibrium models, we show that preexisting factor taxes produce a "tax-interaction effect" that increases the costs of pollution taxes and quotas. Under policies that raise revenue and recycle it through cuts in marginal factor tax rates, this effect is...

Many pollution-related industries have political influence sufficient to block policies that would harm their profits. A politically realistic approach to environmental policy seems to require avoiding significant profit-losses to these industries. Using analytically and numerically solved...