Abstract

This paper characterized optimal fiscal policy in the presence of
pollution, and evaluated it relative to the observed one in Bulgaria.
To this end, a dynamic general-equilibrium model is calibrated to
Bulgarian data. The main findings are: (i) The optimal steady-state
income tax rate is zero; (ii) the benevolent Ramsey planner provides
20% higher utility-enhancing environmental quality; (iii) the
optimal level of carbon taxes is almost three times higher, and the
optimal level of abatement spending is six times higher; (iv) the
optimal steady-state consumption tax is twice lower.