Environmental policies in a stagnant economy

In this study, we examine the impact of environmental policies on consumption and pollution emissions in the cases of full employment and stagnant economy using a dynamic optimization model featuring a monetary economy with persistent unemployment. If full employment prevails, environmental policies such as emission tax and public pollution abatement will naturally crowd out commodity production and thereby decrease consumption. However, if there is unemployment, environmental policies stimulate consumption and production by increasing the total employment and mitigating deflation, simultaneously generating additional pollution emissions. Net pollution emissions may eventually increase. We also examine the optimal environmental policy mix.