Environmental tax policy and intergenerational distribution

We study the effects of environmental taxation within the context of an overlapping generations model. The quality of the environment is modelled as a durable consumption good. Introduction of the environmental tax harms old existing generations and benefits young existing generations as well as all future generations. Increasing the tax in a Pareto-improving manner is easier the higher the pre-existing tax. The reverse holds if tax policy is decided by majority rule. A suitably designed bond policy can be used to redistribute the efficiency gains due to the internalisation of environmental externalities across the generations. (C) 1998 Elsevier Science S.A.