Optimal fiscal policy with environmental tax and pollution abatement spending in a model with utility-enhancing environmental quality: lessons from Bulgaria

<p>This paper characterized optimal fiscal policy in the presence ofpollution, and evaluated it relative to the observed one in Bulgaria.To this end, a dynamic general-equilibrium model is calibrated toBulgarian data. The main findings are: (i) The optimal steady-stateincome tax rate is zero; (ii) the benevolent Ramsey planner provides20% higher utility-enhancing environmental quality; (iii) theoptimal level of carbon taxes is almost three times higher, and theoptimal level of abatement spending is six times higher; (iv) theoptimal steady-state consumption tax is twice lower.</p>