The advantages and disadvantages of various types of environmental policy instruments are well understood under simplifying assumptions about how the rest of the economy works. However, the real world is much more complex than simple economic models often assume. Once one introduces more realistic assumptions about how an economy works, our knowledge about the properties of various types of environmental policy instruments is much less than it is under the simplifying assumptions. The purpose of the proposed project is to increase our understanding of the properties of several types of environmental policy instruments. The analyses we plan to do in the proposed project will explicitly include several important features of the economy that are often ignored in previous analyses. In particular, we shall consider:

- Pre-existing distortionary taxes

- Endogenous technology development

- Dynamics, irreversibility and time consistency

- Non-competitive firms • International trade

- Transboundary/global environmental problems

- Limited rationality, altruism, and social interdependency of preferences