Taxing interacting externalities of ocean acidification, global warming, and eutrophication

Abstract

We model a stylized economy dependent on agriculture and fisheries to study optimal environmental policy in the face of interacting external effects of ocean acidification, global warming, and eutrophication. This allows us to capture some of the latest insights from research on ocean acidification. Using a static two‐sector general equilibrium model we derive optimal rules for national taxes on CO 2 emissions and agricultural run‐off and show how they depend on both isolated and interacting damage effects. In addition, we derive a second‐best rule for a tax on agricultural run‐off of fertilizers for the realistic case that effective internalization of CO 2 externalities is lacking. The results contribute to a better understanding of the social costs of ocean acidification in coastal economies when there is interaction with other environmental stressors.